10-year yield rises to 4.491%, dollar slides 0.3% ahead of payrolls

U.S. Treasury yields climbed and the dollar slid Thursday as traders awaited June payrolls data that will test the Fed's rate-hiking resolve. The 10-year yield rose 1.8 basis points to 4.491% while the DXY index fell 0.3% to 101.078, a nine-day low.

"The dollar is falling as U.S.-Iran talks and diplomatic efforts continue, reducing safe-haven demand," said Konstantinos Chrysikos, an analyst at Kudo.com. "Progress on this front could limit safe-haven demand and weigh on the dollar. Any setbacks could drive more flows into the currency, however."

The divergence extended across global bond markets. The two-year Treasury yield, more sensitive to Fed policy expectations, added 1 basis point to 4.173%. Eurozone government bonds tracked the move higher, with the 10-year German Bund yield rising 2.2 basis points to 2.898%, while Japan's 10-year JGB yield edged up 1.5 basis points to 2.715%. The synchronous move across the three largest developed-market bond markets highlights the macro-driven nature of the positioning.

The June payrolls report, due at 1230 GMT, will provide the clearest signal yet on whether the labor market is cooling enough to allow the Fed to pause or still running hot enough to warrant further tightening. Economists expect hiring to remain stable, though the data has surprised to the upside in each of the past three months, according to SEB's Karl Steiner. "An outcome around expectations means that the Federal Reserve can continue to set the inflation target ahead of the employment target," Steiner said. A strong print would reinforce the case for higher-for-longer rates, while a miss could accelerate the dollar's decline and push bond yields lower.

The ADP National Employment Report showed U.S. private employers added 98,000 jobs in June, below consensus expectations, suggesting some softening in labor demand. Goldman Sachs estimates the World Cup could add as many as 40,000 jobs to the headline payrolls figure, introducing an additional variable for forecasters already grappling with seasonal adjustment noise.

The yield curve has flattened over recent weeks, with two-year yields rising faster than the long end, and could invert again, said James Reilly, senior markets economist at Capital Economics. "We wouldn't be surprised if this curve inverted, but we don't think a U.S. recession is likely," he said. The flattening has been driven by rising short-dated real yields as economic activity remains strong, while falling oil prices have pulled down short-term inflation expectations. "Our sense is that this curve flattening has room to run," Reilly added.

The last time the 10-year yield traded near current levels was in late May, when it briefly touched 4.5% before retreating on softer consumer spending data. A repeat of that pattern would depend on whether payrolls come in below the consensus estimate, which would revive bets on a Fed pause and potentially steepen the curve.

Cross-Asset Transmission

The dollar's decline reflects a broader unwind of safe-haven positioning as U.S.-Iran diplomatic talks progress. The DXY index hit 100.922 earlier in the session, its lowest in nine days, before paring some losses. Any setback in negotiations could drive flows back into the greenback, Chrysikos noted. Meanwhile, eurozone bonds are seen outperforming U.S. Treasurys over the medium term, with UniCredit analysts saying the U.S. is more exposed to fiscal risks. They expect the 10-year Bund yield to trade around 3% and the 10-year Treasury yield near 4.5% over the coming quarters, while short-dated U.S. yields have room to decline as rate hike expectations appear overly aggressive.

What Comes Next

The payrolls data will set the tone for next week's trading, with the Fed's next policy meeting in late July now the focal point. If payrolls exceed 200,000, the probability of a July hike could rise; a print below 150,000 would likely reinforce the case for a hold. The outcome will also test whether the dollar's recent weakness is a temporary correction or the start of a broader trend, with the U.S.-Iran talks adding a geopolitical wild card that could amplify the currency's moves in either direction.

This article is for informational purposes only and does not constitute investment advice.