A Weak Jobs Report Cements a Rate Cut in September, Causing Treasury Bonds to Jump

Treasury markets surged on Friday after a softer-than-expected U.S. jobs report gave traders confidence that the Federal Reserve will move ahead with a rate cut later this month.

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Shorter-dated bonds, which are the most responsive to Fed policy shifts, led the rally. The yield on the two-year Treasury dropped as much as 8 basis points to 3.5%, its lowest level in five months.
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Meanwhile, the 10-year yield slid more than 6 basis points to 4.1%, also hitting a five-month low and signaling broad investor demand for safer assets.

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In the derivatives market, rate swaps reflected near certainty that the Fed will deliver a quarter-point reduction at its September 17 meeting. Traders are now pricing in a 98% probability of that move, with expectations building for a total of roughly 142 basis points of easing over the next year.
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The jobs report served as the final piece of evidence many market participants were waiting for to solidify the case for monetary policy adjustment.

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According to Friday’s release from the Bureau of Labor Statistics, U.S. nonfarm payrolls grew by just 22,000 in August. Adding to the softer tone, prior months’ employment gains were revised down by a combined 21,000 positions.
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The unemployment rate climbed to 4.3%, the highest level since the end of 2021, underscoring that the labor market is losing some of its resilience. Gregory Faranello, head of U.S. rates trading and strategy at AmeriVet Securities, said the data highlights the need for looser policy.
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“The labor market has clearly cooled, and the shift from government-led hiring to private-sector-driven growth is going to require lower interest rates,” Faranello explained.
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He added that the Fed is poised to begin easing this month, and investors should prepare for a series of additional cuts to follow.

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The report comes at a crucial moment for the Fed, which has been balancing its dual mandate of price stability and maximum employment. With inflation cooling from last year’s highs and economic growth slowing, the central bank now has more flexibility to pivot toward supporting the labor market. Market watchers believe that if hiring continues to lose momentum, policymakers will feel increased pressure to act aggressively.

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For bond investors, the rally reflects both near-term expectations and a broader recalibration of growth prospects.
Yields across the curve moving lower signal that traders anticipate easier financial conditions ahead, which could help stimulate business investment and consumer spending.
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At the same time, lower yields suggest investors are hedging against the possibility of further labor market deterioration.

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Looking further out, the scale of expected easing more than a full percentage point over the next year indicates strong conviction that the Fed is entering a new policy cycle.
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For equity markets, this environment could provide support for sectors sensitive to interest rates, such as real estate and consumer discretionary stocks.
However, the flipside is that persistently weak job creation could weigh on corporate earnings and overall risk appetite.

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Ultimately, the latest jobs report has reshaped the outlook for both bonds and stocks. Treasuries are drawing buyers as a safe-haven play, while traders are recalibrating risk positions ahead of the Fed’s September meeting.

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Investors now see rate cuts not just as a possibility, but as a near certainty, with the labor market’s cooling momentum serving as the key driver.

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As Faranello summed up, the Fed appears ready to begin a new phase of monetary easing. For markets, that means navigating a delicate balance: lower borrowing costs may fuel growth and support asset prices, but the underlying weakness in jobs data remains a reminder that the economy is still on fragile footing.

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