Key Takeaways:
U.S. Treasury yields climbed Thursday after fresh data showed the American job market remains resilient, pushing rate-sensitive two-year yields to their highest level since early 2025 and further eroding expectations for near-term Federal Reserve rate cuts.
The yield on the two-year Treasury note, which is most sensitive to changes in Fed policy expectations, rose 5 basis points to 4.31%, its highest since February 2025. The benchmark 10-year yield added 4 basis points to 4.65%, while the 30-year bond yield climbed 3 basis points to 5.14%. Yields and prices move inversely.
"The labor market continues to defy expectations of a slowdown, and that keeps the Fed on hold — or worse, leaning toward a hike," said James Okafor, macro strategist at Edgen. "Every incremental data point that shows strength pushes the first cut further into 2027."
Thursday's data follows a string of economic releases that have complicated the Fed's policy path. June's consumer price index came in at 3.5% year over year, down from 4.2% in May but still well above the central bank's 2% target. Core CPI, which strips out food and energy, held steady at 2.9%. Meanwhile, oil prices have surged on escalating US-Iran tensions, with Brent crude jumping above $85 a barrel, adding to inflationary pressures throughout the economy.
The CME FedWatch Tool now shows a 42.2% probability of a rate hike at the Fed's July 29 meeting, up from 26.7% just a week ago. Markets also price a 33.6% chance of an additional increase by April next year. That marks a dramatic reversal from early June, when traders saw a 60% probability of a cut by September.
Fed Chair Kevin Warsh reinforced the hawkish pivot this week during his debut congressional testimony, telling lawmakers the central bank will have "no tolerance" for inflation. The comments sent two-year yields surging 6 basis points on Tuesday alone.
The last time the labor market showed comparable resilience was in the first quarter of 2025, when nonfarm payrolls averaged 240,000 per month. The Fed responded by holding rates steady at 5.25% to 5.50% through midyear before delivering a single 25-basis-point cut in September. If history is a guide, sustained job growth could keep the central bank on the sidelines for the remainder of 2026.
For risk assets, the implications are stark. Higher bond yields raise the discount rate applied to future corporate earnings, compressing equity valuations. The S&P 500 has already slipped 1.8% this week as the rate repricing gathered pace. The dollar strengthened against a basket of major currencies, with the DXY index rising 0.3% to 105.8.
Economist Nouriel Roubini has warned that structural inflation drivers — including deglobalization, government spending, and geopolitical tensions — could push the 10-year yield "closer to" 8%, a level not seen since 1994. While that view remains far from Wall Street consensus, the direction of travel is clear: resilient data means higher-for-longer rates.
The next major test for markets comes with the July 29 Fed decision, followed by the August jobs report due Sept. 4. If the labor market maintains its current trajectory, the debate will shift from when the Fed will cut to whether it will hike.
This article is for informational purposes only and does not constitute investment advice.
