When is bad news good news for interest rates?

[Andrew Postell]

The bond market is surging this morning following a decisively weak August employment report, which showed just 22,000 jobs added—a far cry from the 80,000 economists had expected. The unemployment rate ticked up to 4.3%, and June’s payrolls were revised downward to a loss of 13,000, marking the first monthly decline since December 2020.

This data has sharpened the dovish tilt in rate expectations. Treasury yields are markedly lower, led by the 10-year note, which is trading at 4.06%, down from its summer range of 4.20% to 4.50%. Mortgage bonds are rallying in tandem, with UMBS 6s up 8 ticks, trading in the mid-102s, and 5.5s gaining traction as the new current coupon.

Fed Funds futures now reflect a near-certainty of a rate cut at the November or December FOMC meetings, with some strategists even floating the possibility of a half-point cut if labor softness deepens.

According to RBC Capital Markets, markets were already positioned for a soft print—but today’s report exceeded expectations for weakness, reinforcing the Fed’s pivot narrative. The Fed’s dual mandate is now in sharper focus. With inflation pressures easing and employment faltering, the central bank may shift its emphasis from price stability to labor market support. The latest Beige Book confirms that seven of twelve Fed districts are seeing hiring hesitancy due to weaker demand and economic uncertainty.

Strategists at ALM First note that the bond market has now priced in an additional 25 basis points of easing over the next 12–18 months, fully baking in a September cut and laying the groundwork for further accommodation.