US Treasury Yields Tumble After Shock Contraction in July Jobs

U.S. Treasury yields plunged across the curve on Friday after a government report showed the labor market unexpectedly contracted in July, prompting a swift repricing of Federal Reserve policy expectations among investors.

Shock Jobs Report Drives Rally

The bond market rally was triggered by the U.S. Labor Department's monthly nonfarm payrolls report, which revealed a surprise loss of 23,000 jobs in July. This figure starkly contrasted with consensus forecasts of an 85,000-job gain. Furthermore, employment data for the prior two months was revised down by a combined 103,000.

The report provided strong evidence that the high-interest-rate environment is beginning to significantly cool the labor market's momentum. Despite the headline job loss, the unemployment rate edged down slightly to 4.1%, according to the report.

Yields Plunge on Shifting Fed Bets

In response to the data, investors aggressively bought government debt, pushing prices up and yields down. The moves were most pronounced at the front end of the curve, which is highly sensitive to monetary policy changes.

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• The 2-year Treasury yield fell 9.2 basis points from its session high to 4.16%, its lowest level since July 17.
• The benchmark 10-year Treasury yield dropped 8 basis points to 4.61%.
• The 30-year Treasury yield declined nearly 6 basis points to 5.175%.

Market Outlook

The weak employment figures have fundamentally altered the outlook for the Federal Reserve's upcoming meetings. Money markets, which had previously priced in a roughly 50-50 chance of a 25-basis-point rate hike at the Sept. 16 meeting, have now slashed those odds to below 15%.

Investors will now turn their attention to next week's July Consumer Price Index (CPI) report. This inflation data will be the next critical test for whether price pressures are cooling fast enough to allow the Fed to extend its pause on interest rate increases.