The US Treasury market experienced a significant surge on Friday, driven by the release of August labor data that showed weaker-than-expected job growth. This data strengthened the belief that the Federal Reserve would soon cut interest rates. The US economy added 142,000 nonfarm payrolls last month, an increase from July’s figure but below the anticipated 160,000. While the unemployment rate ticked down to 4.3% as expected, wages saw higher-than-predicted growth.
Following the release of the data, the probability of a 50-basis-point rate cut in September skyrocketed to 61%, overtaking the 39% probability of a 25-basis-point cut, according to the CME Group’s FedWatch data. This shift in market sentiment reflects growing expectations of declining interest rates.
Traders flocked to bonds, driving yields sharply lower across the Treasury curve. The policy-sensitive two-year yield plummeted over 10 basis points, hitting 3.59% – its lowest level since March 2023. The 10-year Treasury yield fell by 6 basis points to 3.67%, marking its lowest point since June 2023. This movement resulted in a positive slope in the Treasury yield curve from the 10-year onward, effectively ending the more than two-year period of yield curve inversion.
The expectations of rate cuts and falling Treasury yields triggered significant shifts across various asset classes. Bonds rallied, the dollar weakened against the yen, and equity markets experienced a decline.
“No sooner than the payroll print hit, the algorithms marched into high gear, pushing Treasury yields lower as the disappointing headline number, coupled with a series of downward revisions, suggested a more dire economic backdrop perhaps requiring a heavier dose of Fed medicine on Sept. 18,” said Quincy Krosby, chief global strategist for LPL Financial.
Markets are grappling with the question of whether the August payroll data signifies a return of the labor market to pre-COVID norms or an economy losing critical momentum, Krosby added.
Treasury-related ETFs soared, with the iShares 20+ Year Treasury Bond ETF TLT rising 1.1% to $100.65, on track for its highest close since late July 2023. The Japanese yen also strengthened, with the Invesco CurrencyShares Japanese Yen Trust FXY gaining over 1%, poised to close at its highest level since early January 2024.
Volatility surged, as the CBOE Volatility Index (VIX) jumped 14% to 23. Wall Street turned red, with the SPDR S&P 500 ETF Trust SPY dropping 1.5% on Friday, extending its weekly decline to 3.9%, on track for the worst weekly performance since March 2023. Tech stocks were hit hardest, with the Invesco QQQ Trust QQQ down 2.4%, pushing its weekly loss past 5%. Nvidia Corp. NVDA tumbled 4%, extending its weekly loss to 14%, its worst performance in two years.
