Bond markets spent most of Thursday doing what they do best when nobody knows what comes next: almost nothing. Treasury yields barely budged ahead of the August nonfarm payrolls release, with traders content to sit on their hands rather than take a view on whether the Federal Reserve would hike rates again.
Then the jobs report landed, and the calm evaporated.
A number nobody expected
Economists had penciled in somewhere between 53,000 and 56,000 new jobs for August. The actual figure came in at 162,000, roughly three times the consensus estimate. The unemployment rate held steady at 4.1%.
July’s figures got a second look too. What had initially been recorded as a loss of 23,000 jobs was revised to a gain of 21,000, a swing of 44,000 that quietly made the prior month look considerably healthier.
Before the report, the benchmark 10-year Treasury yield sat near 4.75%, the 2-year note hovered around 4.34%, and the 30-year bond was close to 5.23%. After the payroll number crossed the wire, the 2-year yield climbed about 5 basis points to roughly 4.39%, while the 10-year pushed up about 2 basis points to near 4.78%.
The Fed’s next meeting just got more interesting
Market-implied odds for a quarter-point rate hike at the Fed’s September 15-16 meeting climbed back above 50% following the payroll release.
The week leading into Friday had, if anything, pointed in the opposite direction. Fed Governor Christopher Waller delivered comments earlier in the week that leaned dovish, emphasizing disinflation progress and leaving the door open to holding rates steady. ADP’s private payrolls survey added to that softer picture, showing just 38,000 jobs added in August, a figure that would have been consistent with a labor market losing steam.
So when the headline number arrived three times larger than expected, Waller’s more soothing tone from Wednesday suddenly had a shorter shelf life.
What traders watch next
The jobs report is one half of the Fed’s dual mandate. Inflation data is the other, and upcoming Consumer Price Index and Personal Consumption Expenditures releases will do a lot to determine whether Friday’s strong payroll number actually translates into action at the September meeting.
For bondholders, the immediate stakes are straightforward. Higher rates mean lower bond prices, and the 30-year yield sitting near 5.23% is already compressing the value of long-duration holdings accumulated during the low-rate era. Investors in 2-year Treasuries are essentially betting on where the Fed funds rate lands over the next couple of years, and Friday’s repricing to 4.39% reflects a market that is no longer comfortable assuming the central bank is finished. With the September meeting just under two weeks away, the window for new data to change that calculus is narrow.