US government bonds fell as mixed employment data left traders holding tight to expectations that the Federal Reserve will keep interest rates steady until later this year.
The declines on Friday pushed the yield on policy-sensitive two-year Treasuries higher by five basis points to 4.26% as traders maintained bets for a quarter-point rate reduction in September. All told, the swaps market suggests a little less than a half-point worth of rate cuts for this year.
“This definitely takes away market expectations for the window to cut in March,” said Paresh Upadhyaya, director of fixed income and currency strategy at Amundi US Inc. “We are at a pause for now — maybe an indefinite pause if you throw in policy uncertainty.”
Nonfarm payrolls increased by 143,000 last month after a revised 307,000 gain in December, a Bureau of Labor Statistics report showed Friday. The BLS said the wildfires in Los Angeles, as well as severe winter weather in other parts of the country, had “no discernible effect” on employment in the month.
Lindsay Rosner, head of multi sector fixed income investing at Goldman Sachs Asset Management said the jobs report was “mixed” given the weaker headline gain for January while revisions were higher and the unemployment rate ticked lower. As such, she said “the Fed is likely to be cautious about reading too much into today’s report.”
Even after Friday’s moves, yields remain near their lowest levels of 2025, which were hit Wednesday after softer service-sector activity and the Treasury Department’s quarterly supply announcement. This week’s so-called Treasury refunding was the first one under Scott Bessent’s stewardship and suggested that increases remain several quarters away.
The 10-year yield, which rose to a peak of 4.81% in mid-January, has since dropped back toward 4.49%. It edged higher by five basis points on Friday after the labor data.
Traders have meanwhile been pricing in a protracted pause in rate reductions from the Fed as they grapple with an uncertain inflation and policy outlook. While the economy has shown resilience, inflation has proven stickier than anticipated — and above the Fed’s 2% goal of price stability.
Market-implied expectations for the Fed to resume cutting rates after a trio of reductions last year have been bouncing between June and September for several weeks.
“We are still on pause here well through the first half of the year,” Jeffrey Rosenberg, portfolio manager at Blackrock inc., said on Bloomberg Television. “A lot more data will be necessary for the Fed to accelerate the pace of cutting.”
To Rosenberg, the 10-year has become more attractive versus the front end of the Treasury curve as the recent spike in term premium — the extra yield that investors are thought to demand for buying longer-term securities — has “normalized partway.” He said the market awaits details on taxes and fiscal spending from Washington “and that will weigh on where the 10-year and term premium settles.”
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