Yields jumped on the influential 10-year Treasury note, while the prospect of a September Fed rate reduction is rapidly fading
Treasury yields rose sharply on Friday after a stronger-than-expected US employment report prompted investors to reassess the likelihood of interest rate cuts by the Federal Reserve this year. A resilient labor market and steady wage growth forced markets to dial back expectations for policy easing, pushing yields higher across maturities.
The yield on the benchmark 10-year Treasury note climbed seven basis points to 4.46%, while the two-year note—which is particularly sensitive to changes in Fed policy—also rose seven basis points to 3.99%. The moves underscored growing investor uncertainty about the timing and extent of potential rate cuts in 2025.
Interest-rate swaps now imply a roughly 70% chance of a quarter-point rate cut by September, with fewer than two full cuts priced in for the remainder of the year.
“The big takeaway is slowing, but still a strong labor market,” said Jeffrey Rosenberg, a portfolio manager at BlackRock Inc., in an interview with Bloomberg Television. “That is why you are seeing a little bit of the bond market reaction here, pricing out a bit of the expectations in terms of the Fed.”
Labor market resilience tempers Fed rate cut bets
According to Friday’s report from the Bureau of Labor Statistics, nonfarm payrolls rose by 139,000 in May, outpacing expectations even after accounting for downward revisions totaling 95,000 to the prior two months. The unemployment rate held steady at 4.2%, while average hourly earnings continued to grow at an annual rate of 3.9%.
This data offered a nuanced picture of the job market. While private-sector payroll growth slowed to its weakest pace in two years in May, job openings unexpectedly increased in April, indicating that employers are still competing for workers in a tight labor environment.
Federal Reserve officials have emphasized the need for more clarity on inflation trends and broader economic impacts—especially in light of prior policy shifts and global trade uncertainties—before adjusting interest rates.
MBA’s Fratantoni expects cuts, but not yet
Despite the strength of Friday’s data, some economists see room for policy easing later in the year if the labor market begins to deteriorate. Mike Fratantoni, senior vice president and chief economist at the Mortgage Bankers Association, said the current pace of wage growth could moderate if unemployment begins to rise.
“Wage growth remains relatively steady at 3.9% over the past year. At some point, we would expect wage growth to decelerate further if the unemployment rate begins to rise, moving bargaining power from employees to employers,” Fratantoni said.
“These data lined up well with market expectations and are likely to keep the Federal Reserve on hold for the next meeting or two. If the job market does weaken further this summer, as MBA forecasts, there will likely be two cuts to the federal funds target this year.”
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