It's been a quiet start to the year in the bond market but that won't last. There are some major events coming that could spark a rethink about the current consensus outlook, which is something like:
- A moderate acceleration in growth
- Steady to slightly worsening jobs market
- 2-3 Fed rate cuts in 2026
- Declining inflation
- 10-12% equity market gains
That's a cut-and-paste forecast for most years and it's such a consensus call this year that it's dangerously complacent, especially in a Trump-run world.
The trade so far in 2026 has mostly been 'risk on' but if you zoom way in on the above chart, you'll notice that yields have edged lower this year. That shows that someone out there is looking for safety not risk.
It's also coming at a time of eye-watering US deficits and rising political tension. The reality is that social unrest rarely goes down at a time when governments are forced to cut deficits. I expect that Congress will be split after the midterms and suddenly deficit-reduction will be a priority again.
The market angst could begin in short order, with eyes on Friday.
Today we got a series of mixed signals from the data with a poor JOLTS report, ADP employment in-line and the ISM services number accelerating. That's hardly a recipe for confidence in the outlook but plenty will ride on Friday's non-farm payrolls report. And even more important will be Friday's potential Supreme Court decision on tariffs.
How those shake out could get the bond market moving.
Moreover, I think the chart is telling a story of a spring that's increasingly coiled. At some point this 4.00-4.5% range will break and yields will run. My guess is that's lower on some kind of risk-off event but inflation could still accelerate.
