January 2026 Labor Market Data and the Duration Dashboard

The week's rate action pivoted on Thursday, February 5, when JOLTS, Challenger, and initial claims data converged to present the most comprehensive evidence of labor market softening since the pandemic recovery. The 10-year yield dropped as much as 10 basis points intraday to 4.20%—a three-week low—before recovering modestly on Friday as the University of Michigan consumer sentiment beat expectations at 57.3 and one-year inflation expectations fell sharply to 3.5% from 4.0%. The modest end-of-week yield changes belie significant intraweek volatility: the 2-year touched 3.47% during Thursday's selloff, a move of 9 basis points from its prior close, before settling at 3.50%. The 2s10s spread reached approximately 73 basis points during the week—near four-year highs—driven by two reinforcing forces: weakening labor data pulling the front end lower as markets price faster Fed easing, and structural forces anchoring the long end near elevated levels. The incoming Fed Chair Kevin Warsh's stated preference for a materially smaller Fed balance sheet (currently approximately $6.59 trillion) implies reduced government demand for Treasuries over time, while the TBAC's identification of a $1.1 trillion funding shortfall at current auction sizes for fiscal years 2027–2028 adds to long-end term premium.

Credit Pulse: Spreads Hold Near Historic Tights

Investment grade spreads held unchanged at 71 basis points—the 9th percentile of their five-year range—while high yield widened a modest 3 basis points to 237 basis points at the 4th percentile. Both measures remain well below their five-year averages of approximately 95 basis points (IG) and 362 basis points (HY), reflecting persistent technical support from record fund inflows. January 2026 fixed income ETF inflows reached a record $56 billion according to State Street, with the 2025 full year having seen $540 billion flow into taxable bond funds. A notable bifurcation persists within high yield: BB-rated credits continued tightening on a defensive quality bid, while CCC-and-lower spreads widened, reflecting rising stress in software, healthcare services, and chemicals sectors. Oracle's $25 billion bond offering—the largest corporate deal of the year—attracted $129 billion in orders, the highest demand ever recorded for a single corporate bond issue, and priced approximately 30 basis points inside initial guidance.

Oracle's Record Deal and the Corporate Issuance Wave

Oracle's $25 billion 8-tranche offering on February 2 was the week's defining credit event. The deal spanned maturities from 3 to 40 years, with the 40-year tranche pricing at Treasury +195 basis points (6.85% coupon) and the 3-year at T+95 basis points. Moody's rates Oracle Baa2 (negative outlook) and S&P assigns BBB (negative outlook), yet demand was extraordinary—the $129 billion order book represented more than 5x oversubscription. Oracle's 5-year CDS fell 17% on the announcement, and the deal produced positive spillover across investment-grade tech credit.

The offering, part of a $45–50 billion capital raise (approximately half debt, half equity) to fund AI cloud infrastructure for clients including Meta and OpenAI, exemplifies the broader issuance trend. January 2026 investment-grade issuance totaled $239.4 billion, and Wall Street consensus now forecasts $2.25 trillion in gross issuance for the full year—which would surpass the 2020 record of $2.1 trillion. AI-related capital expenditure, over $1 trillion in pandemic-era debt maturing in 2026, and accelerating M&A are the primary catalysts. For spread investors, this supply deluge has been more than offset by inflows, but any disruption to the flow dynamic could create meaningful repricing risk at current valuations.

Treasury Quarterly Refunding and Supply Outlook

The Treasury's quarterly refunding announcement on February 2–4 confirmed $125 billion in coupon auctions for the following week ($58 billion 3-year, $42 billion 10-year, $25 billion 30-year), with auction sizes held unchanged "for at least the next several quarters." Quarterly borrowing was estimated at $574 billion for January–March, down $3 billion from the November projection. The market largely treated the announcement as a non-event—consistent with Treasury's stated preference for predictability—but the TBAC advisory committee's supporting documents contained a forward-looking signal that merits attention: primary dealers estimated a $1.1 trillion funding shortfall for fiscal years 2027–2028 at current coupon auction sizes, with the committee suggesting it could be "beneficial to begin increasing nominal coupon auction sizes earlier, at a more gradual pace." This forward guidance contributed to the curve steepening dynamic, particularly at the 30-year point.

Federal Reserve Policy Outlook and Rate Cut Expectations 2026

Fed communications during the week reinforced a cautious, data-dependent posture. Governor Lisa Cook warned that inflation progress has "essentially stalled" above the 2% target, with risks "skewed toward higher inflation." Atlanta Fed President Bostic echoed that the Fed "should be waiting," characterizing the labor-inflation trade-off as "in conflict." These remarks bracket the Committee's dilemma: labor data argues for easing while sticky services inflation (ISM Services prices paid at 66.6) and elevated tariff-driven cost pressures argue for patience.

Markets currently price the fed funds rate—held at 3.50–3.75% after the January 28 decision (10-2 vote; Governors Miran and Waller dissented, preferring a cut)—to reach approximately 2.90–3.15% by year-end, implying two to three additional 25-basis-point reductions. The first cut is now priced for the June FOMC meeting at 91% probability, up from approximately 70% a week ago. The tension between deteriorating labor data and sticky services inflation—what Bostic characterized as "in conflict"—will likely keep the Committee on hold through at least the May meeting, with the March 18–19 FOMC expected to produce no change alongside updated economic projections that may acknowledge the growing labor market risks.

Policy Crosscurrents and Global Central Bank Divergence

Global central bank decisions added complexity to the rates picture. The ECB held its deposit rate at 2.00% for the fifth consecutive meeting on February 5, as eurozone headline CPI fell to 1.7%—below its 2% target—with core at 2.2%. The Bank of England held at 3.75% by a narrow 5-4 vote, with four members favoring a cut, boosting expectations for UK easing as soon as March. Bank of Japan Board Member Masu called for further rate hikes on February 6, with the 10-year JGB yield near 2.25% at multi-decade highs—a development the TBAC explicitly flagged as having "rippled through global fixed-income markets."

On trade policy, President Trump announced a US-India deal on February 2, reducing reciprocal tariffs from 25% to 18%. The Tax Foundation estimates the aggregate weighted-average applied tariff rate on all imports at 13.5%—the highest effective rate since 1946. The Supreme Court is expected to rule on the legality of IEEPA-based tariffs around February 20. The US dollar index rose approximately 0.9% to 97.7, while WTI crude settled near $63.50–$63.70, declining for the first time in six weeks as US-Iran nuclear talks in Oman eased supply concerns.

Week Ahead: Delayed Data Meets Heavy Supply

• January Nonfarm Payrolls (February 11): The delayed employment report becomes the week's marquee event. Markets expect approximately 150,000–170,000 jobs, but the secondary indicators from this week suggest material downside risk. Benchmark annual revisions, typically released concurrently, add an additional layer of uncertainty.
• January CPI (February 13): Also delayed by the shutdown. Core CPI consensus is approximately 0.3% monthly. Any upside surprise would reinforce the "in conflict" dynamic between weakening labor data and persistent inflation, potentially repricing the June cut probability.
• Quarterly Refunding Auctions (February 10–12): $125 billion across 3-year, 10-year, and 30-year maturities. Foreign demand metrics will be closely watched given rising JGB yields and the TBAC's forward supply warnings.
• DHS Funding Deadline (February 13): The Department of Homeland Security continuing resolution expires, creating a potential fiscal friction point that could reignite shutdown concerns.
• Supreme Court IEEPA Tariff Ruling (~February 20): The anticipated ruling on the legality of tariffs imposed under the International Emergency Economic Powers Act could reshape trade policy expectations and affect inflation projections.