2-year Treasury yield sees biggest one-day drop since July after U.S. jobs report

What yields are doing

• The yield on the policy-sensitive 2-year Treasury note
  TMUBMUSD02Y,
  3.401%
  fell 12.2 basis points to 3.398% from 3.52% on Thursday. It was the biggest one-day decline since July 21, based on 3 p.m. levels, according to Dow Jones Market Data. The yield was slightly higher for the week.

• The 10-year Treasury note yield
  TMUBMUSD10Y,
  3.198%
  was down 7.4 basis points at 3.190% from 3.264% Thursday afternoon. It rose 15.6 basis points this week, the largest weekly gain since the period that ended Aug. 5.

• The yield on the 30-year Treasury bond
  TMUBMUSD30Y,
  3.347%
  was down 3.1 basis points at 3.343% from 3.374% late Thursday. It rose 14 basis points this week, the largest one-week gain since the period that ended July 8.

What’s driving yields

Data released on Friday showed that the U.S. economy added a healthy 315,000 new jobs in August, almost matching the 318,000 forecast of economists polled by The Wall Street Journal. 

The unemployment rate rose to 3.7% from 3.5%. Meanwhile, hourly pay rose a modest 0.3% in August to $32.36, matching the smallest increase in four months, while the rise in pay over the past year remained at 5.2% and is still one of the fastest increases since the early 1980s.

The August jobs data kept expectations alive for a 75 basis point rate hike by the Federal Reserve on Sept. 21, with traders now seeing a 56% chance, down from 75% on Thursday, according to the CME FedWatch Tool. In addition, the Treasury yield curve, often regarded as a reliable indicator of a possible recession, turned less negative — with the spread between 2- and 10-year Treasury yields at minus 20.8 basis points.

Before Friday, the 2-year Treasury yield had been rising this week as bonds sold off in the wake of Fed Chair Jerome Powell’s speech in Jackson Hole, Wyo., last week, when he underlined the central bank’s determination to get inflation under control.

Meanwhile, the Bloomberg Global Aggregate Total Return Index, which tracks both government and investment-grade corporate bonds, has dropped 20% from its 2021 peak, the biggest drawdown since its inception in 1990. A bear market is usually defined as a loss of at least 20% from its previous peak.

See: ‘Bad’ central-bank policies and high inflation collide to create first bear market for global bonds in a generation

What analysts say

“In our view, Fed officials are likely to view the latest employment data as still supportive of strong underlying momentum in the economy amidst a still extremely tight labor market,” said Deutsche Bank’s Brett Ryan, Justin Weidner and others.

“That said, in isolation, the August employment report is not likely to resolve the debate between another 75bp rate hike at the September 21 FOMC meeting versus downshifting to 50bps,” they wrote in a note. “Hence, we expect most Fed speakers (in the coming week) to point to the September 13 CPI report as the lodestar for their upcoming deliberations.”

Hear from Ray Dalio at the Best New Ideas in Money Festival on Sept. 21 and Sept. 22 in New York. The hedge-fund pioneer has strong views on where the economy is headed.