After weak non-farm payrolls, what is the outlook for 10-year US Treasury bonds?
In June, the US non-farm payrolls increased by 57,000, lower than the market expectation of 113,000; data for April and May was revised down by a combined 74,000. On the surface, this appears to be positive for US Treasuries and negative for the US dollar, but the market response was not entirely in line: On July 2nd, the US 2-year Treasury yield dropped from 4.17% to 4.14%, while the 10-year yield rose from 4.48% to 4.49%, causing the 2s10s yield spread to widen from 31bp to 35bp. In other words, the market did buy at the short end, but not at the long end. The primary implication of weak payrolls is a decrease in the necessity for further rate hikes, not an immediate switch to recession trades.
The short end dropping is not hard to understand: the obvious slowdown in non-farm payrolls, combined with downward revisions in the previous two months, shows the labor market is not overheating. For the 2-year yield, the most direct trade is the decreased tail risk of further rate hikes by the Federal Reserve. In other words, weak payrolls first and foremost reduce the probability of an immediate or possible additional hike.
However, this data is not weak enough to push the market directly toward recession pricing. There are several temporary factors in the report: leisure and hospitality jobs fell due to earlier hiring, and the participation rate for the 25–34 age group dropped by 1.6 percentage points, among other things. The signal to the Federal Reserve is to be less hawkish and more patient, not to immediately pivot to easing.
A single month of weak payrolls only indicates a marginal deceleration in job gains; it's not enough to prove long-term growth or that the real interest rate center will be quickly suppressed,which is also the key reason why the 10-year yield did not fall significantly. Meanwhile, fiscal financing, Treasury supply, and capital expenditure for AI data centers continue to generate financing demand. Weak credit in the private sector does not mean overall US funding demand is declining; government and AI investments still support the long-end rate center.
Therefore, after weak payrolls, the market is not trading an overall decline in the yield curve. With falling rate hike expectations, the short end benefits more directly, while the 10-year just sees its upward pressure eased—it hasn't shown a confirmed downward trend and is still seen as oscillating.
Looking forward, CPI is the main data point; if June CPI is significantly below expectations, the 10-year yield could test the 4.35%–4.40% range; if core inflation remains around or above 0.3%, it may revisit above 4.50%. In the medium term, only when job market cooling further spreads to rising layoffs and weakening consumption, along with falling inflation, will the long end truly see space for downward movement.
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Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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