US Treasuries Soar as Slower Job Growth Boosts Fed Rate-Cut Bets

Softer-than-expected US jobs data for July, showing a modest 73,000 payroll increase and significant downward revisions to prior months, triggered a sharp rally in Treasuries, with two-year yields tumbling 25 basis points to 3.71%. This led traders to overwhelmingly price in a Federal Reserve interest rate cut as early as September, with some strategists now anticipating a 50 basis point reduction, reversing recent market sentiment. The data also weighed on the dollar and deepened declines for US equities, signaling heightened concerns about economic weakness and a potential turning point in monetary policy expectations.

Analysis

A significantly weaker-than-expected July US jobs report has triggered a dramatic repricing of Federal Reserve policy expectations, fueling a major rally in US Treasuries. The report showed a payroll increase of only 73,000, well below the 104,000 median estimate, and included substantial downward revisions of nearly 260,000 for the prior two months. This brought the three-month moving average to a post-pandemic low of 35,000, signaling a sharp deceleration in the labor market. In response, the two-year Treasury yield plunged as much as 25 basis points to 3.71%, its largest single-day drop in a year, while the two- to ten-year yield curve steepened by over 10 basis points. The market is now fully pricing in two rate cuts this year with an 80% probability of a cut in September. This sentiment, supported by weak factory activity data, has been amplified by strategists from firms like CreditSights and BlackRock who are now calling for a more aggressive 50-basis-point cut next month. The move pressured the US dollar, which fell 1%, and exacerbated losses in equities, with the S&P 500 declining nearly 2% amid concerns over economic weakness and new tariffs. This market reaction represents a stark reversal from sentiment just days prior and appears to validate the dissenting views of Fed Governors Waller and Bowman, who recently argued for a rate reduction.

Key Decisions for Investors

• Investors should consider increasing exposure to intermediate-duration fixed income, particularly two- to ten-year Treasuries, to capitalize on the market's strong conviction for imminent and potentially aggressive Fed rate cuts.
• Exercise caution with US equity positions, as the sharp deterioration in labor market data heightens near-term economic growth concerns, which may not be fully offset by monetary policy easing.
• Monitor upcoming inflation data (CPI/PCE) closely, as any signs of persistent price pressures from tariffs could challenge the market's dovish assumptions and introduce significant volatility.
• Consider strategies that benefit from a weaker US dollar, as aggressive Fed easing expectations are likely to weigh on the currency relative to its peers.