U.S. Treasuries rallied sharply on Friday after unexpectedly weak U.S. employment data triggered a major shift in Federal Reserve rate expectations.
Yields fell across the curve, with some maturities dropping by as much as nine basis points as investors moved into government bonds.
Two-Year Treasury Yield Drops Sharply
The policy-sensitive two-year Treasury yield fell 9.2 basis points from an intraday high of 4.252% to around 4.16%.
That marked its lowest level since July 17.
The benchmark 10-year Treasury yield also declined, falling around eight basis points to 4.61% from 4.69% earlier in the session.
Longer-dated bonds also attracted buyers.
The 30-year Treasury yield dropped nearly six basis points to 5.175% from 5.233%, reversing losses seen earlier in the day.
U.S. Payrolls Unexpectedly Contract
The rally followed the release of the July nonfarm payrolls report from the U.S. Labor Department.
The U.S. economy unexpectedly lost 23,000 jobs during the month.
Economists had forecast an increase of around 85,000 positions.
Previous employment data was also revised sharply lower. Combined job growth for the prior two months was reduced by 103,000 positions.
The weaker figures reinforced concerns that momentum in the U.S. labor market is fading.
Labor Market Shows Signs of Cooling
The unemployment rate edged slightly lower to 4.1%.
However, the decline in payrolls suggested that hiring conditions are becoming less supportive.
High borrowing costs continue to weigh on economic activity, while geopolitical uncertainty in the Middle East has added another layer of risk for businesses and investors.
The latest data therefore strengthened the view that restrictive monetary policy may be having a more visible impact on the labor market.
Fed Rate Hike Bets Fall Sharply
The weak jobs report caused traders to rapidly reassess the outlook for Federal Reserve policy.
Before the data was released, money markets had been pricing in roughly even odds of a 25-basis-point rate hike at the Fed’s September 16 meeting.
Following the payrolls surprise, those expectations fell sharply.
The probability of an autumn rate increase dropped below 15%, reflecting growing confidence that the Fed may keep interest rates unchanged.
That shift in expectations helped drive Treasury yields lower across the curve.
Investors Turn Attention to U.S. CPI Data
Markets are now focused on the upcoming July Consumer Price Index report.
The inflation data will provide another important signal about whether price pressures are easing enough to support an extended pause from the Federal Reserve.
A softer-than-expected CPI reading could reinforce expectations for stable interest rates and provide further support for U.S. Treasuries.
However, stronger inflation data could revive concerns that the Fed may still need to maintain a tighter policy stance.
For now, the combination of weaker employment growth and reduced rate-hike expectations has given the U.S. bond market fresh momentum.
