Macro Talking Points from MFS Investment Management.
The market overshoots first and asks questions later
We may have just observed yet another case of market knee-jerk reaction in US rates, following the robust US jobs report on Friday. In the process, the US 2-year rate shot up a hefty 14bp to 4.19%, its highest level since early 2025.[1] That in turn caused the US yield curve to flatten further, with the 2s10s now trading down to 38bp.[2] The rates market now predicts that the Fed will raise its policy rate twice over the next twelve months. That is a bit far-fetched, in our view. The bar for the Fed to raise its policy rate is still fairly high as we see it. What we can agree with, however, is that the probability of a rate hike is now higher than that of a rate cut, but this does not mean by any stretch that this would be our central scenario. Given the current volatility in rates, a cautious stance towards duration is warranted, at least in the near term. But similar to the story in other markets, when the dust finally settles, we may find that the elevated level of US front-end rates represents an attractive opportunity.
When good macro news is bad market news
Friday’s market reaction to the US jobs report was a reminder that stronger growth is not always good news for risky assets. A firmer labor market pushed yields higher, hitting the parts of the market most exposed to long-duration expectations, particularly technology and semiconductors, while also weighing on other rate-sensitive stocks. The issue was not the jobs data itself, but what it might mean for rates and the valuation support markets have been relying on. After a strong two-month rally, some consolidation in these names looks healthy rather than alarming. Optimism had risen quickly and so had the bar for further upside. Markets have also grown used to a narrow leadership group and the assumption that policy will ultimately ease. When yields move higher, that combination becomes harder to sustain. Higher rates raise the cost of capital, put pressure on valuations and leave the market less forgiving of stretched expectations, particularly around the AI build-out. For investors, the message is simple: this looks less like a change in the growth story and more like a reminder that markets led by a narrow group of expensive winners can wobble when the rate backdrop shifts. That is usually a good moment to focus on diversification, valuation discipline and selectivity rather than chase the market’s recent favorites (Contribution from Ross Cartwright, Lead Strategist – Strategy and Insights Group).
This is not 2022
There are many reasons why we believe that this is not a replay of the traumatic 2022 scenario. One of them relates to the demand for fixed income. Government bond yields have recently risen in many markets as a result of the macro impact of the Iran war, the repricing of inflation risks, and expectations of some future monetary policy tightening. In 2022, the sharp rise in government bond yields drove investors and fund flows away from fixed income. But this time around, the data suggests this is not the case. Bond fund flows across segments of global fixed income—from US investment grade, European credit, emerging markets debt to municipal bonds—have been robust over the last several weeks. We believe this mainly reflects a larger valuation cushion compared with the backdrop of 2022. In particular, today’s breakeven yields are significantly higher, in some cases 2 to 3 times higher, than they were at the onset of the Russia/Ukraine war. With that in mind, there seems to be more investor appetite to step into rate dislocations and bond market selloffs to lock in yields at an elevated level than there was when rates were near 0%. Given a long-term demographic backdrop of an aging population in many developed countries, this trend of yield-hungry investors looking to add fixed income following rate dislocations may become a more structural element rather than a temporary feature of bond markets going forward, which we believe supports the case for a larger strategic allocation to fixed income (contribution from David Peterson, Insights Analysis Lead Analyst).
[1] Sources: Bloomberg. Generic 2-year UST bond yields. Data as of 8 June 2026.
[2] Sources: Bloomberg. 2s10s = difference between the generic 10-year UST bond yields and the generic 2-year UST bond yields. Data as of 8 June 2026.
