(Bloomberg) — US Treasuries rallied after an unexpectedly weak July employment report prompted traders to further dial back expectations for Federal Reserve interest-rate hikes, cementing the biggest weekly gain in short-term maturities since May.
Two-year yields, which are most sensitive to Fed policy expectations, fell as much as nine basis points after the report before settling about five basis points lower near 4.19%, leaving them down the most on a weekly basis since May. Benchmark 10-year yields were down about nine basis points for the week at 4.65%, their first weekly decline in three.
Friday’s Bureau of Labor Statistics data showed nonfarm payrolls decreased 23,000 last month following substantial downward revisions to the prior two months.
“The headline number being negative is a total shock,” said Tom di Galoma, managing director at Mischler Financial Group. “I guess the Fed will not be tightening in September.”
The data suggested the labor market may be facing challenges after surprising strength earlier this year, which had fueled investor bets on Fed hikes. Traders are now pricing about a roughly 40% chance of such a move at the next scheduled decision in September, according to interest-rate swaps, compared to closer to 60% before the data.
In the options market linked to the Secured Overnight Financing Rate — an interest rate guided by the Fed’s policy rate — traders scrambled to unwind hedges against such scenarios as the market pricing in two rate hikes by the end of this year.
Jeffrey Rosenberg, senior portfolio manager at BlackRock, told Bloomberg Television that he “would be hesitant to write this report off as the revisions in the headline number are pointing to weakness. The market is not ignoring it, with a big hike probability coming out with the front-end rally.”
To be sure, investors are still fully pricing a hike by year-end, alongside significant hedging for a second in 2027. That partly reflects the volatility of jobs figures in recent years, making it a hard dataset to trade with conviction.
“Even though the headline figure seems alarming, we wouldn’t extrapolate too much from today’s numbers,” said a TD Securities team including Oscar Munoz. “While the employment data certainly carry a softer flavor to it, and there’s some signal to take from it after a second consecutive surprise to the downside, the trend for employment conditions remains healthy.”
Fed Chairman Kevin Warsh’s refusal to provide forward guidance further complicates the market’s response. Last week, the central bank held its key interest-rate tool unchanged, though three officials dissented in favor of a hike.
What Bloomberg Strategists say…
“The low unemployment rate is perhaps tempering some of the fixed-income reaction, but it’s just gotten a lot harder to make the case for raising rates with job growth average just 20k over the last three months. I’d expect this bond rally to stick.”
—Cameron Crise, Macro Strategist, Markets Live
For the full analysis, click here.
In an interview with Punchbowl News posted on Friday, President Donald Trump reiterated his preference for lower interest rates while also acknowledging that Warsh is part of a board that votes on rate moves. Trump struck a softer tone than the sharp criticisms he threw at Warsh’s predecessor, Jerome Powell.
The next major economic data is US consumer prices figures due on Wednesday. The surge in energy prices stemming from the US’s war with Iran has reignited worries regarding inflation, though a weaker-than-expected CPI print published last month helped ease some of those concerns.
“If data looks somewhat softer in the next couple of months, especially when it comes to the inflation side, they are probably not going to want to hike,” Stephanie Roth, chief economist at Wolfe Research, said on Bloomberg TV. “They are going to want to see how the data progresses.”
Treasuries also pared their advance ahead of a trio of large auctions next week, the first ones of the August-to-October financing quarter. They include a $58 billion three-year note Tuesday, a $42 billion 10-year note Wednesday and a $25 billion 30-year bond Thursday, all new issues. Based on indicated levels, the three- and 10-year notes set to draw the highest yields since early 2025.
For the 30-year, the 5.20% indicated yield exceeds auction results for the tenor since August 2001. Last month’s 30-year bond auction drew 5.058%, the highest result since 2007.
“There’s more value in the front end of the curve than the long end,” said Phoebe White, head of US rates strategy at UBS Group. “The high volatility in long term yields reduces the attractiveness to some extent.”
–With assistance from Kristine Aquino and Edward Bolingbroke.
(Recasts with updated pricing.)
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