Strong Jobs Data Curbs Bets on Fed Rate Cuts, Leading to a Drop in Treasury Yields

U.S. Treasury yields moved higher on Friday after stronger-than-expected job and wage data led investors to reassess expectations for interest rate cuts by the Federal Reserve this year. The solid labor report prompted traders to reduce their bets on how soon and how much the Fed might ease monetary policy in 2025.

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Yields rose across the curve, with all major maturities gaining at least five basis points. The 10-year Treasury note yield climbed seven basis points to 4.46%, while the yield on the two-year note — which is particularly sensitive to expectations for Fed interest rate moves — also increased by seven basis points, settling at 3.99%.

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Market-based expectations for rate cuts shifted in response. Interest-rate swaps now imply roughly a 70% probability that the Fed will lower rates by a quarter point by September. That represents a more cautious outlook than previously held, with fewer than two full rate cuts priced in for the rest of the year.

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Jeffrey Rosenberg, portfolio manager at BlackRock Inc., described the labor market as “slowing, but still strong” in an interview with Bloomberg Television. He explained that such resilience in employment data is contributing to the market’s reaction — specifically, the reduced confidence in aggressive rate cuts by the central bank.

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According to the Bureau of Labor Statistics data released Friday, U.S. nonfarm payrolls increased by 139,000 in the latest month. However, figures for the previous two months were revised downward by a combined 95,000 jobs, somewhat tempering the headline number. The unemployment rate remained unchanged at 4.2%.

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Federal Reserve officials have recently signaled they need more data before making decisions about cutting interest rates. Policymakers are navigating a difficult balance between preventing inflation from re-accelerating and avoiding an economic downturn. Given the complexity of the current environment — including lingering effects from past policy shifts and global trade uncertainty — Fed leaders have indicated that it may take time before they feel confident enough to begin easing.

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Recent economic data has sent mixed signals. While Friday’s jobs numbers highlighted ongoing labor market strength, other indicators have pointed to a cooling trend. For example, private-sector hiring in May slowed to its weakest pace in two years, and job openings unexpectedly ticked up in April, complicating the overall outlook.

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Ed Al-Hussainy, a strategist at Columbia Threadneedle Investments, noted that Friday’s jobs report likely won’t prompt any major shifts in Fed policy direction. “There’s nothing here to change the status quo for the Fed,” he said, adding that traders anticipating imminent summer rate cuts may now rethink their positions.

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The broader financial market also reacted to the jobs report. The Bloomberg Dollar Spot Index briefly rose to its highest level of the day following the release of the data, but later pulled back slightly. Despite Friday’s bump, the dollar index is still tracking a 0.5% loss for the week.

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Overall, the takeaway from Friday’s developments is that while the U.S. job market appears to be slowing somewhat, it remains strong enough to keep the Fed cautious about cutting rates too soon. With inflation concerns still lingering and economic indicators providing a mixed message, traders are dialing back their earlier optimism for multiple rate reductions this year.

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Investors will now look ahead to upcoming inflation reports and additional labor market data for further guidance on the likely path of monetary policy. The Fed has repeatedly emphasized its data-dependent approach, meaning each new report could significantly influence market expectations.

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Until then, the bond market appears to be adjusting to the possibility that the Fed will maintain its current policy stance for longer than initially anticipated — a view reinforced by both Friday’s yield movements and the updated pricing in interest rate futures.

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