Structural Shifts and the Breakout in Treasury Yields

The technical picture for Treasury yields is one of contained pressure, setting the stage for a decisive move. The benchmark 10-year note yield closed at 4.24% on January 16, trading directly between its 50-day moving average at 4.125% and its 200-day moving average at 4.233%. This compression within a narrow band signals a market in equilibrium, where buyers and sellers are evenly matched. The immediate setup suggests a breakout is imminent; the yield is simply waiting for a catalyst to break decisively above resistance or below support.

The market's forward view is clear: it does not anticipate a near-term Fed pivot. The 10-year minus 2-year spread remains positive, a key indicator that investors still expect the central bank to maintain higher short-term rates for longer. This spread is a leading signal for economic cycles, and its current positive reading argues against the narrative of an imminent rate cut. The technical compression is therefore not a sign of dovish sentiment, but rather a pause before a potential shift in the curve's shape.

Recent geopolitical volatility has provided a tangible source of yield pressure. Concerns over the U.S.-Denmark-Greenland dispute and the broader uncertainty surrounding Federal Reserve Chairman Jerome Powell's independence have injected risk premiums into the market. These events, while not the primary driver of the long-term yield trajectory, have contributed to the choppiness that keeps yields pinned between key moving averages. They serve as a reminder that Treasury markets are not immune to external shocks, which can act as the spark for a breakout.

The Inflation and Policy Crosscurrents

The technical compression in Treasury yields is a pause, not a resolution. The fundamental drivers-specifically inflation trends and the Federal Reserve's policy path-are now the decisive crosscurrents that will determine the breakout's direction. The market is waiting for a clear signal on whether persistent price pressures are finally easing or if the risk of a slowdown is becoming the dominant force.

Inflation nowcasts point to a deceleration, which could support a pause in tightening. The latest estimate for the core Personal Consumption Expenditures (PCE) price index, the Fed's preferred gauge, shows a monthly rate of 0.23% for January. This follows a similar 0.22% print in December and suggests the underlying trend is moderating. For context, the year-over-year core PCE rate was 2.64% in December, a level that remains above the Fed's 2% target. The critical test for this deceleration narrative arrives in just a few days. The next major data point is the PCE inflation report, scheduled for release on January 22. A print that confirms the monthly trend is holding or accelerating would reinforce the case for higher yields, as it would argue that disinflation is not yet a done deal. Conversely, a weaker-than-expected number could fuel a rally in bonds and a drop in yields.

Policy expectations are equally pivotal. The Federal Reserve is not expected to cut rates at its January meeting. The latest labor market data has brought some cohesion to the Federal Open Market Committee (FOMC). With the unemployment rate stabilizing, J.P. Morgan Global Research now sees the Fed as on hold at the January meeting. The committee is projected to keep the federal funds rate steady at 3.5–3.75% through 2026, with a potential hike of 25 basis points in the third quarter of 2027. This policy consensus lacks the dovish tilt that would support a sustained decline in long-term yields. The absence of an imminent cut removes a key tailwind for Treasury prices.

Connect these factors to the structural narrative. The tension between persistent inflation and the risk of a slowdown is being resolved through these fundamental data points. The PCE report will be the immediate catalyst, testing the market's conviction in the disinflation story. If inflation continues to cool, the Fed's pause could extend, potentially allowing yields to drift lower as the immediate risk of further hikes recedes. If inflation proves stickier, the Fed's commitment to higher-for-longer rates would likely push yields higher to reflect a prolonged period of elevated policy rates. The breakout from technical compression is therefore not a random event; it is the market's verdict on this evolving fundamental debate.

Catalysts, Scenarios, and Risk Watch

The breakout from technical compression is now a function of near-term catalysts and the resolution of structural tensions. The market's next decisive move will hinge on the interplay between inflation data, policy commentary, and the fundamental re-evaluation of growth and risk.

A stronger-than-expected PCE print could reignite inflation fears and push yields higher, testing the 4.30% resistance level. The latest monthly core PCE nowcast stands at 0.23%, a figure that has held steady from December. If the official January report, due on January 22, confirms this level or moves higher, it would argue that disinflation is not yet entrenched. This would reinforce the Fed's higher-for-longer stance, as projected by J.P. Morgan Global Research, and likely push the 10-year yield toward its recent high near 4.30%. The risk here is that persistent price pressures force a re-pricing of the policy path, extending the period of elevated short-term rates and steepening the curve.

Conversely, a weaker-than-expected inflation print or dovish Fed commentary could fuel a sell-off in longer-dated Treasuries, with the 10-year yield potentially testing the 4.00% support. The current technical setup has the yield trading between its 50-day and 200-day moving averages, with the 4.00% level representing a key floor. If the PCE data shows a meaningful acceleration in the cooling trend, or if Fed officials signal a more dovish tilt than expected, it would undermine the case for sustained high yields. This could trigger a rally in bonds, driving the 10-year yield lower and testing the support at the 4.00% mark.

Monitor the 10-year yield's relationship to the 2-year yield; a flattening or inversion would signal a major shift in growth expectations. The spread between these two maturities is a leading indicator for economic cycles. As of January 16, the 10-year yield was at 4.24% and the 2-year at 3.59%, leaving a positive spread of about 65 basis points. A narrowing of this spread, or a move into negative territory, would be a structural red flag. It would suggest that market participants are pricing in a significant slowdown or recession risk, which would fundamentally alter the yield curve's shape and likely drive long-term yields lower as the Fed is forced to pivot.

The risk of Fed independence being compromised is a potential structural catalyst for lower yields. While the Fed is expected to remain on hold, with the funds rate steady at 3.5–3.75% through 2026, the broader debate over central bank autonomy is a latent risk. Advocacy from figures like Kevin Hassett for lower rates introduces a political dimension that could, over time, influence policy expectations. This is not an immediate threat, but it represents a structural vulnerability that could undermine the market's confidence in the Fed's commitment to price stability. If perceived independence erodes, it could fuel a flight to safety in Treasuries, pushing yields lower as the perceived risk of future monetary easing increases.

The bottom line is that the breakout will be a verdict on the structural debate. The PCE report is the immediate catalyst, but the ultimate direction will depend on whether the market sees a durable disinflation story or a growing risk of economic weakness. The yield curve's shape, as measured by the 10-year minus 2-year spread, will be the clearest signal of which narrative is winning.