Weak Jobs Report Sparks Big Rally in Short-Dated Treasuries

Signals of a weak labor market led to lower Treasury yields on Friday. (Michael M. Santiago/Getty Images)

Treasuries rallied in the aftermath of a weak jobs report, with shorter-dated notes seeing the biggest decline in yields to kick off August in more than two decades.

The two-year Treasury’s yield traded as low as 3.7165% Friday morning, a decline of 0.2335 percentage point for the day—the largest intraday fall on the first day of August ever, based on data going back to 2001, according to Dow Jones Market Data. Yields fall when Treasury prices rise, meaning Friday’s performance is delivering a windfall to folks invested in Treasuries with shorter maturities.

“That’s a big move,” wrote Capital Economics markets economist, James Reilly. And it comes as investors had seemingly expected some relative calm in the market, he added. The bond market’s fear gauge—the MOVE index—had fallen to its lowest level since early 2022 on Thursday, he noted.

On Friday, economic data showed the U.S. added 73,000 jobs in July, but perhaps more concerning was that job growth was revised lower by a net 258,000 for May and June. Signals of a weak labor market have boosted projections for a Federal Reserve interest-rate cut in September, leading to lower Treasury yields on Friday.

“As things stand, on these data, with tariff pass-through [on inflation] modest, the Fed would cut in September,” wrote TS Lombard Chief Economist Freya Beamish. Market strategist Peter Boockvar also said investors “can likely bank on a September” cut.

Fed Governors Christopher Waller and Michelle Bowman have recently made arguments for lower rates, citing concerns about a weakening labor market. But at the same time, overall inflation is running at a 2.7% annual rate, according to the June consumer price index —still much higher than the Fed’s long-run target of 2%. If the Fed reduces rates too soon, it risks stronger inflation when the full effects of tariffs remain unknown.

The bond market seems to think the labor market is a “catastrophe that we need to address through monetary policy,” said Jim Bianco, president of Bianco Research, in a webinar.

But he warns, “If you look at these job numbers like the bond market is doing and think we need to stimulate the economy, it’s not going to do anything for jobs, it’s just going to create more inflation.”

On the long end of the Treasury market, moves have been much more modest. The 10-year’s yields have traded as low as 4.229%, marking the largest intraday decline since mid-April. The 30-year yield’s decline is even milder, down just 0.0077 percentage points.

Write to Karishma Vanjani at karishma.vanjani@dowjones.com.