US yields dive as markets bet big on Fed cuts after dismal jobs print

NEW YORK – US Treasury yields slumped on Friday after data showed the world’s largest economy created far fewer jobs than expected in August, reinforcing expectations the Federal Reserve will resume cutting interest rates at a policy meeting this month.

The rate futures market has also started to price in a small probability of a 50 basis-point easing at the end of the two-day meeting on September 17.

In afternoon trading, US two-year yields, which reflect interest rate expectations, and the benchmark 10-year yield both fell to their lowest since April.

The two-year yield was last down 7.9 basis points (bps) at 3.513%. It was down 11 bps on the week, the biggest weekly fall since late July.

The benchmark 10-year yield sagged 8.8 bps to 4.088%. On the week, the yield fell nearly 14 bps, the largest weekly decline since late July as well.

Data from the Bureau of Labor Statistics showed that US nonfarm payrolls increased by only 22,000 jobs last month after rising by an upwardly revised 79,000 in July, the Labor Department said on Friday.

Economists polled by Reuters had forecast payrolls rising by 75,000 positions after a previously reported 73,000 gain in July.

Data showed that in June, the US economy lost 13,000 jobs instead of the initially reported 14,000 payrolls gain.

“The warning bell that rang in the labor market a month ago just got louder. A weaker-than-expected jobs report all but seals a 25-basis-point rate cut later this month,” said Olu Sonola, head of US economic research at Fitch Ratings in New York.

“The Fed is likely to prioritize labor market stability over its inflation mandate, even as inflation drifts further from the 2% target. Four straight months of manufacturing job losses stand out.”

Following the data, the US rate futures market has priced in a 7% chance that the Fed will cut by 50 bps later this month, and a 93% probability of the more standard 25 bp cut, according to LSEG calculations. The 50-bps bet was as high as 15% earlier in the session.

Traders have also priced in about 71 bps of easing this year, or about three cuts of 25-bps rate declines per meeting. That was up from 59 bps on Thursday.

The Treasury yield curve, meanwhile, initially steepened following the jobs report, with the gap between two-year and 10-year yields widening to 59.6 bps, compared with 57.1 bps late on Thursday. On Wednesday, the curve hit 63.8 bps, its widest spread since April.

The steeper curve suggested that traders are pricing an imminent rate cut from the Fed. But it also reflected inflation worries if the Fed cuts too aggressively, which have prompted investors to sell the long end of the curve.

The yield curve was last at 56.2 bps.

In other Treasury maturities, the yield on US 30-year bonds, the focus of an investor sell-off early this week, fell to a two-month low and was last down 10.2 bps at 4.7%. The yield dropped 15 bps this week, the largest weekly decline since late March.

On Wednesday, 30-year yields touched 5% for the first time, since July.

For next week, the key data will be the US consumer prices index (CPI) for August. A Reuters poll showed headline CPI of 0.3% last month and a year-on-year rate of 2.9%.

“A softer-than-expected core inflation print (0.1% below the month-on-month consensus) increases the likelihood that the Fed cuts in October and subsequent meetings,” wrote Wells Fargo in a research note.

We think the risks are relatively symmetric around next week’s CPI report, but the composition will matter.”

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Matt Tracy; Editing by Kevin Liffey, Sharon Singleton, and Chizu Nomiyama )