US Treasury Yields Drop As Jobs Data Hints Rate Cuts Are Coming

What’s going on here?

US Treasury yields fell on Friday as weak jobs data raised the likelihood of a Federal Reserve rate cut in September.

What does this mean?

The benchmark 10-year Treasury yield declined after reports showed weakening labor market signals. June saw 206,000 new non-farm jobs, beating the 190,000 estimate, but significant downward revisions for April and May suggest underlying frailty. The unemployment rate ticked up to 4.1%, adding to concerns. As a result, anticipations for a September rate cut have surged, with CME’s FedWatch Tool showing a 71% chance of a 25 basis point cut, up from 57.9% last week. Treasury yields followed suit, with the 10-year note dropping by 6.5 basis points to 4.282%, and the 30-year bond and 2-year note also seeing declines.

Why should I care?

For markets: Reacting to signals of change.

Treasury yields reflect the market’s expectations of future economic conditions. With yields on the 10-year note dropping by 6.5 basis points this week, investors are positioning for potential rate cuts in response to weaker job growth and rising unemployment. These adjustments also narrow the yield curve gap, now at a negative 33.6 basis points, indicating economic caution ahead.

The bigger picture: Economic slowdown concerns grow.

The downward revisions in job data align with an expected economic slowdown. Portfolio managers note that while June’s job report wasn’t dire, the revisions expose critical areas of weakness. This situation prompts the Federal Reserve to focus intensely on labor market health as it weighs inflation risks and contemplates a rate cut – a strategy that could shape economic policies and market expectations in the coming months.