US yields slump on labor market jitters as rate cut odds climb

NEW YORK – US Treasury yields fell on Thursday, with those on two-year and 10-year notes dropping to four-month lows, after data showed mounting evidence of a weakening labor market that affirmed expectations the Federal Reserve will resume cutting interest rates at its policy meeting later this month.

US yields, however, came off their lows in the afternoon session as market participants positioned ahead of Friday’s nonfarm payrolls report.

A Reuters poll showed a forecast of 75,000 new jobs created last month, compared with 73,000 in July. The unemployment rate was seen to have ticked up to 4.3% from 4.2% in July.

“It’s going to come down to nonfarm payrolls and what it means for the Fed,” said Zachary Griffiths, head of investment grade and macro strategy at CreditSights in Charlotte, North Carolina.

“We’ve shifted our call fairly dramatically to call for a 50 basis-point cut in September as the labor market has weakened a lot…and we are looking for more weakness out of the report on Friday. And if you think about the Fed’s reaction function a year ago, they went 50 (bp cut) then, and the labor market looks quite a bit more fragile now based on the latest data.”

In afternoon trading, US two-year yields, which are tied to monetary policy, slipped 2.4 basis points (bps) to 3.589%. It slid to a four-month low of 3.588% earlier in the session.

The benchmark 10-year yield also slid to its lowest since early May of 4.167%. The yield was last down 4.4 bps at 4.167%.

US 30-year yields also retreated, down 3 bps at 4.862%. On Wednesday, it topped 5% amid a global bond selloff caused by fiscal worries. The 5% yield was the highest in about 1-1/2 months.

Treasury yields fell overall after the ADP National Employment Report showed that US private payrolls increased less than expected in August, rising by 54,000 jobs last month after a slightly upwardly revised 106,000 increase in July. Economists polled by Reuters had forecast private employment increasing by 65,000.

At the same time, data showed US initial jobless claims rose 8,000 to a seasonally adjusted 237,000 for the week ended August 30. Economists polled by Reuters had forecast 230,000 claims for the latest week.

“We continue to see softness growing in the labor market as tariff policy uncertainty lingers, immigration changes take effect, and AI adoption grows,” wrote Eric Teal, chief investment officer at Comerica Wealth Management in emailed comments.

“The silver lining is the weaker the jobs data, the more cover there is for stimulative interest rate cuts that are on the horizon. The boost in the latter half of this year should come from easier monetary policy and stimulative fiscal policies to avoid further economic deterioration.”

Following the data, US rate futures have priced in a 98% probability that the Fed will lower rates by 25 bps at the end of the two-day policy meeting on September 17, according to the CME Group’s FedWatch tool.

Traders have also priced in about 61 bps of easing this year, up from 56 bps earlier this week.

The Treasury yield curve, meanwhile, flattened for a second straight day, with the gap between two-year and 10-year yields narrowing to 58 bps, compared with 59.6 bps late on Wednesday. Earlier on Wednesday, the curve hit 63.8 bps, its widest spread since April.

The curve continued to show a bull-flattening trend, referring to a scenario in which long-term interest rates are falling faster than those on the short end of the curve. That, for now, reflects a slight decline in inflation expectations with the softening labor market and often precedes the Fed cutting interest rates.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Tomasz Janowski, Nick Zieminski, and Diane Craft)