Bond Traders Scrap Bets on July Rate Cut After Strong Jobs Data

U.S. Treasury prices dropped sharply after the June jobs report came in stronger than expected, causing traders to abandon hopes for an interest-rate cut from the Federal Reserve this month. The most pronounced selloff occurred in short-dated bonds, with two- and five-year yields both climbing by nearly 10 basis points. Meanwhile, the 10-year Treasury yield also jumped, rising 6 basis points to 4.34%.

‍

According to Gregory Faranello, who leads U.S. rates trading and strategy at AmeriVet Securities, this report effectively rules out a rate cut in July. “The Fed will take the summer off,” he said, suggesting the central bank is now unlikely to adjust policy until later in the year. Faranello added that labor market data was the key metric for the Fed, and this latest employment update gives Fed Chair Jerome Powell the flexibility to hold off on any policy changes for the time being.

‍

In the interest-rate swaps market, expectations for a July cut dropped to almost zero following the report. Before the data was released, markets had priced in about a 25% chance of a cut at the July 29–30 policy meeting. The odds of a reduction in September also fell, with traders now assigning about a 75% likelihood—down from earlier projections.

‍

The jobs report showed that U.S. employers added 147,000 jobs in June. This number beat expectations by a wide margin, as economists surveyed by Bloomberg had forecast just 106,000 new positions. The figures for the previous two months were also revised slightly higher, adding further strength to the overall picture. Additionally, the unemployment rate ticked down to 4.1% from May’s 4.2%.

‍

The surprising strength of the labor market adds another layer of complexity for Fed officials who have been trying to balance the dual risks of inflation and economic slowdown.

‍

Prior to the report, many investors had expected signs of labor market cooling that would give the central bank justification for easing monetary policy as early as July. Instead, the data suggests that the U.S. economy remains resilient enough to delay any immediate stimulus.

‍

This development deals a blow to bond bulls who had been betting on rate cuts beginning this summer. As the likelihood of a near-term cut diminished, yields on short-term bonds rose sharply, reflecting a shift in expectations toward tighter monetary policy for longer.

‍

For now, the Fed appears to be in a holding pattern. Recent comments from Powell and other Fed officials had already signaled that they were not in a rush to cut rates, preferring instead to gather more data over the coming months. The June jobs report reinforces that cautious stance.

‍

While inflation has been gradually coming down from its peak, it remains above the Fed’s 2% target. With the labor market showing continued strength, the central bank has less incentive to move quickly. This gives policymakers additional time to assess whether inflation will continue to trend lower without requiring aggressive monetary support.

‍

The bond market's reaction also underscores how sensitive traders remain to any signals about the Fed’s policy direction. Even modest changes in employment data can lead to outsized moves in yields, especially for shorter-duration securities that are more closely tied to near-term rate expectations.

‍

Looking ahead, all eyes will be on the Fed’s September meeting, which now appears to be the earliest possible window for a rate cut. Even then, the outcome will depend on how inflation and labor data evolve over the next few months. If the economy continues to show strength, particularly in hiring and wage growth, the Fed may choose to stay on hold even longer.

‍

In summary, the unexpectedly strong June jobs report significantly altered the interest-rate outlook, effectively removing the chance of a Fed rate cut in July and pushing expectations for policy easing further into the future. Short-term Treasury yields surged in response, while longer-term yields also climbed.

‍

For now, the Federal Reserve is likely to take a patient approach, waiting for clearer signs that inflation is firmly under control and that the labor market is softening before moving forward with rate cuts.

‍