Treasuries rallied after job growth virtually halted in August, cementing expectations that the Federal Reserve will resume cutting interest rates this month to support the US economy.

By underscoring how sharply businesses have reduced hiring over the past four months, the employment figures at least temporarily swept aside worries about rising debt levels and trade-war induced inflation, which have weighed on the bond
market.  With clear signs that the economy is at risk of stalling, Treasury yields tumbled to the lowest since early April, when President Donald Trump’s tariff rollout send markets into a tailspin by darkening the outlook for the global economy. The
figures came just two weeks after Fed Chair Jerome Powell signaled that the central bank is ready to start easing again if the labor market continued to weaken, as data released since then has consistently showed.

“The Fed is going to ride to the rescue and cut rates,” Jeffrey Rosenberg, portfolio manager at BlackRock Inc., said on
Bloomberg Television.  The Friday rally was led by two-year notes, the most sensitive to changes in monetary policy, driving the yield down as much as 12 basis points to 3.46%. By the afternoon, the gains faded some, though yields were still down as much as 9 basis points across maturities. The advance pushed some recently placed wagers on declining rates deeper into the money, as 10-year yields approach the 4% target levels. The combined profit on a couple of positions are
now up to north of $50 million. The weak economic data took precedent over the concerns about inflation, swelling debt loads — and even Trump’s attack on the Fed’s independence — that have shadowed global bond markets in recent weeks and kept long-term yields elevated. Those risks haven’t disappeared, however, and could shift to the foreground again next week when the US releases closely watched inflation gauges ahead of the Fed’s Sept. 17 interest-rate decision.

What Bloomberg Strategists say…
“A 4% yield on benchmark 10-year Treasuries is the next target after the post-jobs rally, but likely not Friday as traders will be reluctant to push the envelope ahead of next week’s inflation data.”
—Alyce Andres, US FX/Rates Strategist, Markets Live

But Friday’s job data — which showed that payrolls increased by just 22,000 last month and the unemployment rate
rose to a four-year high — drove traders to increase their bets on the scale of the Fed’s interest rate cuts by providing a
strong rationale to resume easing policy.  Bank of America Corp.’s economists, who had predicted the Fed would hold off on its next move until the new year, on Friday scrapped that call, saying they now anticipate two quarter-point moves by year end due to the employment picture.  Standard Chartered’s strategists expect a jumbo 50-basis- point cut at the Sept. 17 meeting, saying the call will be supported by the preliminary benchmark revision of the employment data due next week. Such a move would repeat what the Fed did a year ago, when it started the easing cycle with a half-point move following a disappointing job report.  Futures markets showed traders see only a small chance of such a large move this month. But pricing shows a quarter-point cut is seen as a sure thing and policymakers are expected to follow up with similar cuts at the remaining two meetings of the year.

“A half-point is not out of the question, but at this stage of the game I would still lean to a quarter-point cut,” said
Kevin Flanagan, head of fixed income strategy at WisdomTree. “A lot is already priced in. So the data’s going to have to point
in the direction that the Fed has to become accommodative or cut below neutral.”

For now, traders remain unwilling to push the chances of a bigger rate cut this month, and instead focused on pricing in more cuts into 2026, with the Fed seen easing to 2.9% by September 2026. That would leave the benchmark interest-rate below 3%, a level is widely considered as neutral to growth.  Since Powell used his appearance at the Jackson Hole symposium last month to telegraph that he is ready to step in to support the labor market, a string of soft data — including job opening and ADP’s private employment figures this week — have supported the case for such a move. For bond investors, the danger now is that sentiment has shifted too fast, given that stickier inflation could complicate the Fed’s path. The central bank’s dot-plot forecast released in June showed policymakers already expected the unemployment rate to drift higher to 4.5% by year-end when they penciled in a median prediction of two cuts this year. It was at 4.3% last month.

“Given the Fed pricing, it’s difficult for the front end to rally more,” said Dan Carter, portfolio manager at Fort Washington Investment Advisors. “Inflation is likely to be higher than what they want. It needs recession for the front-end yields to go much further.”

Traders have already driven down short-term yields considerably by piling into a popular curve-steepening trade, anticipating that long-bonds will underperform as the Fed lowers its overnight rate. That’s already happened to a large degree, widening gap between five- and 30-year yields to the highest since 2021.

“We’re getting to the point where the market is saying: you’re not going to be less restrictive, but you’re going to move to being accommodative,” said Leslie Falconio, head of taxable fixed income strategy at UBS Global Wealth Management.