U.S. bond market: Short end leads decline in Treasuries, strong employment report boosts rate hike expectations

US Treasury bonds fell across the board on Friday, with the yield curve exhibiting a strong bearish flattening trend. Following the strong May nonfarm payrolls report, the premium for future rate hikes in the coming months has surged significantly. The pricing of the OIS corresponding to the Fed meeting fully incorporates the expectation of a 25 basis point rate hike before the end of this year. Short-term and medium-term government bonds led the decline, narrowing the yield spread between 5-year and 30-year bonds to the narrowest level since April 2025. In New York time just past 3 p.m., US Treasury yields were trading near the day's highs, with the 2-year Treasury yield rising about 12 basis points intraday and long-term yields increasing by 3 to 4 basis points. In a volatile flattening market, the yield spreads between 2-year and 10-year bonds, and between 5-year and 30-year bonds, narrowed by 4.5 and 6.5 basis points intraday respectively, with most of the declines occurring in the early trading session, largely influenced by the strong May employment report. Subsequently, OIS contracts tied to the Fed meeting turned more hawkish, fully pricing in the expectation of a 25 basis point rate hike by December and projecting that the policy rate peak will rise to over 4% by mid-next year. The short-term US Treasury bonds fell following the release of the employment report, with a series of large trades in December federal fund futures further fueling the downturn, as the pricing for rate hikes continued to soar, putting pressure on related futures contracts.