Treasury Yields React to Labor Data
The U.S. Treasury market surged on Friday as August labor statistics revealed weaker job growth than anticipated, triggering speculation of Federal Reserve rate cuts.
Last month, the US economy added 142,000 nonfarm payrolls, falling short of the projected 160,000 increase, leading to a rise in market expectations for interest rate reductions.
With increasing odds of a 50-basis-point rate cut in September, traders flocked to bonds, resulting in a notable drop in yields across the Treasury curve.
Rate-Cut Probabilities Soar
| Rate Cut | Current* | 1 day ago | 1 Week ago |
| 50 basis points (0.5%) | 61% | 40% | 30% |
| 25 basis points (0.25%) | 39% | 60% | 70% |
The two-year yield plummeted over 10 basis points to 3.59%, while the 10-year Treasury yield sank 6 basis points to 3.67%, marking its lowest level since June 2023.
As a result of this shift, the US yield curve has started to normalize, discontinuing a prolonged period of inversion that lasted over two years.
Market Reaction and Asset Movement
The anticipation of rate cuts and declining Treasury yields triggered significant market movements, with bonds rallying, the dollar weakening against the yen, and stock markets experiencing declines.
Quincy Krosby, chief global strategist for LPL Financial, commented on the reaction, highlighting that algorithms swiftly responded to the disappointing employment data by pushing Treasury yields lower in anticipation of potential Fed intervention in September.
Analysts are evaluating whether the August employment figures signal a return to pre-pandemic labor market conditions or indicate a slowdown in economic momentum.
- Treasury-related ETFs, including the remarkable performance of the iShares 20+ Year Treasury Bond ETF (TLT), surged and surpassed $100.65, approaching its highest closing level since mid-2023.
- Additionally, the yen strengthened, with the Invesco CurrencyShares Japanese Yen Trust (FXY) on course to end at its peak since early 2024.
- Volatility spiked, as evidenced by the CBOE Volatility Index (VIX) climbing 14% to 23.
- Equity markets, such as the SPDR S&P 500 ETF Trust (SPY), dipped 1.5% on Friday, extending weekly losses and facing their worst performance in over a year.
- Technology stocks, represented by the Invesco QQQ Trust (QQQ) and Nvidia Corp. (NVDA), experienced notable declines, with Nvidia posting its weakest performance in two years.
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