Bond Traders Bet on Continued Fed Rate Hikes as Nonfarm Payrolls Unlikely to Alter Tightening Outlook
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Bond traders are firmly positioned for more Fed rate hikes. Even if September payrolls slow to roughly 90,000, markets still price in at least three more 25-bp increases through next July — the bar for jobs data to reverse that call is very high.
Why won't September payrolls be enough to shift the outlook?
Economists expect September nonfarm payrolls of roughly 90,000, down from 162,000 the prior month — but in line with this year's monthly average.
This means → the labor market is cooling from "very strong" to "normally strong." That is not enough to give the Fed a reason to pause.
T. Rowe Price's investment-grade bond head Steve Boothe put it bluntly: "You need close to zero, or even negative — and I think you really need a downside surprise in wages" before Treasuries rally.
Thursday's Treasury rally — what actually drove it?
Two-year yields dropped roughly 10 basis points below 4.8%; the 10-year pulled back from a 24-year high.
The catalysts had nothing to do with U.S. fundamentals: haven flows triggered by France's fiscal outlook pushed money into Treasuries, while Fed Governor Bowman and Vice Chair Jefferson both signaled policymakers should take more time before deciding on further hikes.
In plain terms = Treasuries rallied, but because Europe wobbled and Fed officials talked rates down — the U.S. economy's heat has not cooled at all.
What structural forces keep pushing yields higher?
Oil hovers near $100 a barrel, with Middle East tensions unresolved and energy-cost pressure intact.
The U.S. federal government is running large deficit spending, and the AI investment boom continues to fuel economic expansion.
This reflects a multi-layered, persistent upward pressure on yields — one payrolls print is unlikely to reverse it.
What if the data comes in far weaker than expected?
BMO's head of U.S. rates strategy Ian Lyngen notes that positioning is now heavily skewed toward higher rates. A sharp downside miss could trigger short-covering and an outsized rally.
Put simply = everyone is betting "rates go higher." If the data suddenly turns cold, a stampede to cover shorts could send Treasuries sharply up in the short term.
But if the print meets or beats expectations, the pressure for yields to revisit multi-year highs will be hard to shake.
Have yields peaked? The market has no consensus
Federated Hermes strategist Karen Manna says she is less bearish since the September hike but still does not believe yields have topped.
Her read: "A good portion of our thesis about rates going this high has already played out" — yet yields "could still move higher."
This means → even the most cautious bears are wavering, but no one is willing to call the top. Friday's payrolls report is the next critical test.
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