US Rates - Another Volatile Week in Rates Markets

Welcome to At Any Rate, J.P. Morgan's global research podcast where we take a look at the story behind some of the biggest trends and themes in fixed income, currency, and commodity markets today. I'm Ipek Ozil, Head of U.S.

Interest Rate Rehabilitative Strategy, and I'm joined here today by Jay Berry, Head of Global Rate Strategy, to discuss our latest thoughts on the rates markets following another volatile week. We are recording this on June 5th, 2026, and our comments today are based on our published research available on J.P. Morgan Markets.

Of course, today is Payroll Friday, and the print was a big surprise to the upside with payrolls coming in at $172K versus an estimate of $88K. And there was also a large upwards revision to the prior print. And that's not the only thing that happened this week, right?

We started the week with more news around the Middle East conflict, and we also had other strong economic data. So all in all, another big week for rates markets and more to come. And with that, Jay, let's get started.

Large moves today following payrolls, but even taking a step back, Fed expectations have been shifting and the Fed rhetoric has been shifting as well. How are you thinking about the Fed and U.S. rates on the back of this? Epek, thanks so much for having me on the podcast today.

So you're right. It was a pretty strong employment report today. The headline number beating expectations, as you mentioned.

There were revisions higher as well. The unemployment rate on a three-decimal place actually moved lower and the labor income implications were quite positive as well. So it makes sense to me that we have repriced Fed expectations further.

In our baseline forecast, we have the Fed on hold until the third quarter of next year. At that point, we're expecting a hike. And money markets are clearly pricing in a more aggressive path than that, pricing a full hike by the end of this year, by the December meeting, and pretty close to two hikes over the next one to two years or so.

So while markets have outpaced our own expectations, I can understand why. I think we've been making the case now for the past month since the April Fed meeting that the Fed was ready to move to a neutral bias at the upcoming meeting in about 10 days. And while I think that has probably been right, given how we have repriced Fed policy expectations over the course of the last five or six weeks, we've made the case that in a world in which term premiums in the U.S. and globally have risen, if you've got a central bank with a neutral bias, that can contribute to having an upward slope to the money market curve, even out for the next one to two years.

So the fact that you've had labor market data outpacing expectations and pricing in more and earlier hikes makes sense to me. I think back to our own economics team, they have been talking for some time that this conscious uncoupling between capital expenditures and labor markets would ultimately resolve itself through stronger job growth, and we're seeing that right now. So if the labor market appears relatively stable, and right now the unemployment rate has basically been stable for the past year, the pace of employment growth has picked up and inflation is well over the Fed's target, it makes sense to me that we're pricing in a hiking path.

And if I look forward, even with these moves, Treasury yields are trading a little bit too low in our valuation framework. So I think in aggregate, this is a justification of the moves that have occurred. The Fed is moving to a neutral bias.

The Fed speak this week has been hawkish. Valuations look rich. So I think there is a risk that rates can continue to move higher from current levels from here, and that we wouldn't stand in the way of it, to be quite honest.

Thanks, Jay. That's very helpful. But is there anything else technical that we should be focused on?

You've talked about the fundamentals and the macro backdrop. And I guess related to that, what does this mean for your rate forecast? No, I think that's a great question.

I think two things to highlight there. First, you did mention it on the technical side. Our own Treasury client survey extended a little bit this week, but is very close to where it's been over the past four weeks, and really not out of line with where it's been for the past year.

But I think we've observed that the way we track the positioning of the asset manager community, that they are as overweight duration as they have been since the Fed was easing last fall. And if anything, that's come with a more neutral curve bias rather than a steepening bias. So it seems like much of the buying occurred longer out of the curve.

So I'd say positioning is a little bit long here, and that could be a risk to higher rates. The other thing I'd say is that by and large, with these moves that we've had, Treasuries not only appear rich relative to their fundamental drivers in our frameworks, but they also appear quite rich from a cross-market perspective. So when we put the pieces of the puzzle together, the risk that markets can price more in earlier Fed hikes in a world in which term premium is positive, a world in which positioning is a little bit long, a world in which Treasuries look rich in our valuation framework and on a cross-market basis.

And we've just really decided that we're going to adjust our yield targets higher to reflect this new reality. So previously, we had forecast that 10-year yields would likely rise to about 4.5% by the end of this year. They're clearly above that level right now.

Now we're forecasting that 10-year yields will rise to 4.7% by the end of the year. So again, while markets are pricing in an earlier and sooner set of hikes than in our forecast, even if we just see some mean reversion here and yields retrace back to where they should be, considering how we're pricing Fed policy over the next few years, inflation and growth, and if we sort of retrace back to the mean relative to where we're trading to European government bonds, Aussie government bonds, Canadian government bonds, and even gilts, that in itself lends itself to bias to higher yields. And that's why we've made those adjustments from right here.

That makes a lot of sense. And just to pivot back to something you were talking about, you were talking about cross-market opportunities. Are you seeing any?

Yeah, no, absolutely. And I think just to dig in a little bit more with what I just briefly said, like it stands out to us that Treasuries appear rich relative to their developed market peers. And I think to us, you can see it most aggressively in the Bund-Treasury spread.

So in our own frameworks, once again, looking at the Bund-Treasury spread as a function of how we're pricing relative policy differentials over the course of the next one to two years, and looking at relative changes in growth forecasts from our forecast revision indices, it appears to us that that spread is trading about eight to 10 basis points too low. So I think there is a real risk here that not only can U.S. yields move higher, but that they should underperform rest of the world in this move as well, which is a little bit unusual because the story over the course of the last three months or so, as oil prices have moved higher, is rest of world leading U.S. But now this is becoming a decidedly domestic story as well, given that the labor market data has improved and given that inflation does remain above trend with growth still holding in.

So I think there's a definitive risk from a cross-market perspective that we see yields move higher in the U.S. while they don't actually move higher in rest of world. And I think we talked to our colleagues in European rate strategy in London, they've been making the case that Bund yield should be probably in a 290 to 310 range. And we're kind of getting close to the upper end of that range right now.

And it would support that view as well. So I think those are the important ones. But maybe Ipek, if I can just sort of turn it back to you, this has obviously been a highly volatile week, not just in the U.S., but globally.

And we've seen this decisive flattening of the curve. So what's going on in derivatives markets right now and what's going on in vol markets over the course of the week? Yeah.

So as you said, it's been a highly volatile week and implieds have increased over the week, basically on the back of one geopolitical backdrop and also higher yields today. And looking ahead, there are still a few potentially high volatile days in the next couple of weeks. So that means that could remain elevated.

And it's kind of worth it's an interesting exercise, but it's kind of worth digging into how much markets are pricing in for the FOMC meeting, which up until I would say maybe in the last year or so, it has not been a high volatile event. But if we look at what sort of, if we try to infer what the markets are pricing in for the FOMC, we end up seeing roughly 10 to 11 basis points of volatility for that day, which is pretty large given that implieds are currently between, call it five to six basis points per day. So all of that to say, there could be even more volatile in the next couple of weeks if the geopolitical backdrop doesn't change.

And we have two high event risk days coming up, like CPI and FOMC. Thanks so much, Ipek. So thinking about that kind of high vol events, and if we kind of take a step about this week, though yields moved a lot, and obviously it's a function of the Fed rhetoric and the non-farm employment report, as we talked about, but swap spreads have been very well anchored.

And you look at it over the week, they haven't really moved much at all. But if I sort of like hold back the perspective and take a multi-year perspective on this, it's really notable that swap spreads, particularly at the front end of the curve, are now back at multi-year wides, or really they're wides in over a year when twos are trading here at SOFR plus 14 basis points. So what's going on in swap spreads right now?

And what should we be thinking about with respect to spreads going forward? Yeah, I mean, it's been a second since spreads were not the main story. They've been quite volatile in the past, I would say actually even a year, but especially in the past three weeks, I mean, three months.

But yeah, so front end had always appeared to be well anchored. The volatility in the front end was always much lower compared to the long end, but it's been a case of slow and steady. So two-year spreads have been slowly drifting up.

And like you said, they now sit at SOFR plus 14 basis points. So this could result in a shift where investors look for carry opportunities. As we've talked about this in this podcast before, when vol is low, investors can turn to swap spreads for carry.

And two-year spreads used to look attractive on a risk-adjusted basis. But now it's for the first time in six months, three-year spreads look as attractive as two-year spreads did on a risk-adjusted basis. So for investors who are looking for carry opportunities, there could be a shift from the very, very front end to slightly further out the curve to three years and then potentially to the five-year sector.

Looking ahead, yes, there is the risk geopolitical backdrop, but there could also be more tailwinds for spreads as we get into a period of negative bill issuance. But it's, again, at the risk of repeating myself, it is a little hard to take and outtrack V1 spreads, given the high vol backdrop. Jay, so is there anything else that you wanted to add that we have not covered in our podcast?

I think the only other thing I'd say right now is that with the employment data out of the way, we do have inflation data to consider next week. But I think the overwhelming story has got to come from the notion that, once again, as we circle back to our opening comments, that it seems like there's been this labor market recoupling and firming. So that means that the focus is going to squarely turn to the June Fed meeting, which, again, is still more than 10 days away.

But I think it's particularly important to consider it, because this will be Warsh's first appearance as the new Fed chair. And while, again, markets seem pretty not complacent, but I think embracing the notion that the Fed will move to a neutral bias, I think there's a lot more to unpack here with respect to the Fed meeting. And just thinking about the evolution of the dots for 2026 and 2027, because those dots are still projecting on a median basis a cut in 2026 and a cut in 2027 as well.

Thinking about how the press conference goes as well. So, you know, certainly with this sort of pivot more hawkish from Fed and the understanding that the bulk of the committee has moved a long way from where we were even in April. I think that's going to be the next sort of set of things we'll be considering over the course of the next week or so.

But outside of that, I think we've, you know, really covered it here, Ipek. And thanks for having me on the podcast today. And I think we should probably just wrap it up.

So thanks for listening. And stay tuned for more episodes of At Any Rate, which is JP Morgan's global research podcast series. This communication is provided for information purposes only.

Please read JP Morgan research reports related to its contents for more information, including important disclosures. Copyright 2026. JP Morgan Chase and Company.

All rights reserved. This episode was recorded on June 5, 2026.