NEW YORK, Sept 4 (Reuters) – U.S. Treasury yields rose on Friday after a surprisingly strong U.S. employment report led investors to increase bets on tighter policy from the Federal Reserve, thought they came off their highs as market participants prepared for inflation data next week.
Nonfarm payrolls surged by 162,000 jobs last month, the Bureau of Labor Statistics said, far outpacing expectations of economists polled by Reuters, who had forecast they would increase by 56,000. Adding to the robust picture, a previously reported drop of 23,000 for July was replaced by an upwardly revised 21,000 gain for that month.
The payrolls report caught a market already looking ahead to next week’s inflation reports, particularly the core consumer price index (CPI) — which strips out food and energy prices — and may tip the balance in favor of more hawkish views in the market, though there is still a relative lack of certainty as to whether this will result in a hike when the Fed meets on September 15 to 16.
“I think that payrolls kind of just gave us more emphasis on inflation next week,” said Molly Brooks, rate strategist at TD Securities in New York.
Two-year yields, which are particularly sensitive to changes in monetary policy, led the rise and were last up 4 basis points at 4.37%. The initial wave of bond selling propelled the yield to a peak of 4.4246%, its highest since January 2025.
In the immediate wake of the report, short-term interest-rate futures prices implied about a 65% chance of an increase in the U.S. policy rate at the Fed’s meeting this month, up from about 55% before the data. By New York afternoon trade, they were back down to 57%.
The data followed relatively dovish remarks on Thursday from Federal Reserve Governor Christopher Waller, who said he was inclined to be patient on rate policy while watching to see if price pressures ease.
Waller’s remarks soothed a market that had been on edge since last Friday, when Fed Chairman Kevin Warsh came closer than he has yet to acknowledging interest rate hikes may be needed to ease price pressures.
“From the Fed’s perspective, Chair Kevin Warsh stated last week that he viewed labor market conditions as broadly consistent with full employment, but that inflation remains uncomfortably high,” said Brock Weimer, analyst, investment strategy at Edward Jones. “We believe today’s report further confirms that policymakers will remain focused on the inflation side of their mandate.”
Federal Reserve Bank of Cleveland President Beth Hammack reiterated in a post Friday on LinkedIn her view that interest rates need to go up to combat “too high” levels of inflation.
U.S. President Donald Trump said that unless the Federal Reserve cut interest rates, he would stop trading with countries with which the United States had a deficit.
The yield on 10-year Treasury notes was up nearly 2 basis points around 4.78% after reaching a peak of 4.812% following the data.
The yield on the 30-year Treasury bond was little changed at 5.24%.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 40.37 basis points, 2.7 basis points lower on the day as shorter-dated yields led the rise.
The breakeven rate on 5-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.378% versus 2.376% on Thursday.
The 10-year TIPS breakeven rate was last at 2.352%, little changed versus Thursday.
The U.S. dollar 5-year forward inflation-linked swap, seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed’s quantitative easing, was last at 2.436%.
(Reporting by Burton Frierson; Additional reporting by Rashika Singh; Editing by Hugh Lawson and Aurora Ellis)
