Weak July employment data in the United States leads to a big increase in US bond yields, and the Fed may cut interest rates in September.

After a disappointing employment report was released, the US Treasury bond market quickly strengthened, especially the short-term Treasury bonds performed particularly well, with yields falling sharply, marking the largest drop on the first day of August in over 20 years. On Friday morning Eastern Time, the yield on the two-year US Treasury bonds fell to 3.7165% at one point, dropping 23.35 basis points intraday, the largest single-day decline on the first day of August each year since 2001. Since bond prices and yields move inversely, this meant that investors in short-term US bonds were able to achieve significant gains on that day. James Reilly, an economist at Capital Economics, commented, "This is a very large move." He pointed out that the market had originally expected a relatively calm period at the beginning of August. The MOVE index, which measures volatility in the US bond market, had already fallen to its lowest level since early 2022 on Thursday, and this sudden volatility undoubtedly disrupted market expectations. The reversal in market trends was caused by a set of employment data released that day. The data showed that only 73,000 nonfarm jobs were added in the US in July, well below market expectations. More concerning was the downward revision of a net 258,000 new jobs for May and June. These weak signals led to a significant increase in market expectations for a rate cut by the Federal Reserve in September, driving US bond yields lower across the board. Freya Beamish, Chief Economist at TS Lombard, said, "Given the current data backdrop, coupled with limited tariff pass-through to inflation, the Fed is likely to cut rates in September." Market strategist Peter Boockvar also pointed out that investors can now "basically bet that the Fed will cut rates in September." Recently, Federal Reserve Board members Christopher Waller and Michelle Bowman have also publicly supported a rate cut, citing concerns about the worsening labor market. However, the current level of inflation cannot be ignored. According to the Consumer Price Index (CPI) released in June, the US inflation rate is still high at 2.7%, well above the Fed's long-term target of 2%. If rates are cut hastily, it could potentially stimulate even higher inflation before the full impact of tariffs is felt. Jim Bianco, President of Bianco Research, stated in a webinar that the bond market currently seems to view the job market as "a disaster that must be addressed through monetary policy." However, he also warned that if the labor market data is interpreted as the bond market does, and if loose policies are believed to be necessary to stimulate the economy, the result may not be creating more jobs, but rather pushing inflation higher. In contrast, the long-term US bond market's reaction was much more subdued. The yield on the 10-year US Treasury bonds fell to a low of 4.229% intraday, marking the largest single-day drop since mid-April; while the yield on the 30-year US Treasury bonds only slightly declined by 0.0077 percentage points.