US Treasury prices rose after a mixed employment report showed signs of weakness, prompting traders to increase bets on a Federal Reserve rate cut next month.
Short-term bonds, which are more sensitive to Fed policy changes, led the gains, with the two-year yield dropping about 3 basis points to 3.57%. The benchmark 10-year yield edged lower to 4.11%.
The delayed September jobs report, released after the US government shutdown, showed nonfarm payrolls rose by 119,000, above the median economist forecast of 51,000. However, the unemployment rate climbed to 4.4% from 4.3% in the prior month, reaching its highest level in nearly four years, while August payrolls were revised downward.
"The unemployment rate is more important—it challenges the argument of labor market balance," said George Catrambone, head of fixed income at DWS Americas. "That’s why Treasuries rallied."
Bond traders increased wagers on a third consecutive Fed rate cut next month, reversing a pullback in expectations seen just a day earlier after the Bureau of Labor Statistics announced it would not release October’s jobs report separately.
Interest-rate swaps tied to Fed policy now price in a roughly 34% chance of a 25-basis-point cut, up from about 20% before the jobs data. Market expectations for a December rate cut had been steadily declining in recent weeks as some policymakers pushed back against further easing amid inflation persistently above the Fed’s 2% target.
Following the jobs report, Cleveland Fed President Beth Hammack warned that lowering rates to support the labor market could risk keeping inflation elevated for longer and heighten financial stability concerns.
The September jobs report is the only major official employment data before the Fed’s December meeting. The Bureau of Labor Statistics confirmed Wednesday that October’s report will be combined with November’s and released after the Fed’s December 9-10 policy meeting, leaving policymakers and investors without a key economic indicator.
"I’m not sure this gives a clear answer to the December question," said John Briggs, head of US rates strategy at Natixis North America, referring to the September labor data.
He added that the probability of a December cut may be "underpriced," but "the current situation isn’t compelling enough to take the risk." As a result, he expects bond markets to remain range-bound for now.
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