US bonds fall as strong jobs data undermines Fed cut outlook

Published Sat, Apr 4, 2026 · 12:33 PM

[NEW YORK] Bond traders ended the week betting that the Federal Reserve will keep interest rates steady this year, on signs of a stabilising US labour market and uncertainty about the economic impact of war in the Middle East.

Treasuries fell after better-than-expected March employment data, sending yields higher by three to four basis points across maturities in Friday’s (Apr 3) abridged trading session. Traders erased what little remained of their wagers on Fed easing this year and trimmed expectations of a cut in 2027. 

“This doesn’t push the Fed closer to raising rates; it also doesn’t help the rate cut case,” said Tony Farren, managing director in rates sales and trading at Mischler Financial Group. 

The latest employment report offered a positive picture of the US employment market in March, showing an unexpected drop in the unemployment rate in addition to a bigger-than-estimated increase in nonfarm payrolls.

The potential for those elements to alarm Fed policymakers concerned about inflationary pressures in the US economy were offset by revisions showing even bigger job losses than previously reported for February. Also, the growth rate of wages slowed more than estimated.

But the US$31 trillion Treasuries market remains transfixed by the war in the Middle East, which has disrupted oil supply from the region. Bond investors have been torn between growth and inflation risks posed by the surge in energy prices. US President Donald Trump, who ordered the Feb 28 attack, has said Iran has until Apr 6 to reopen the Strait of Hormuz or have its power plants destroyed. It’s unclear if that deadline is still in place.

Yields over the past month largely tracked oil prices higher on the risk that rising gasoline prices in US inflation gauges would cause the Fed to delay any rate cuts.

With oil-market trading closed on Friday ahead of the Easter holiday, three tankers broadcasting Omani ownership appeared to have navigated the Strait of Hormuz by hugging their home country’s coastline. Still, the conflict escalated as Iran downed a US fighter jet. 

Before the war started, overnight index swaps had priced in more than two quarter-point rate Fed cuts this year. Those expectations were subsequently erased, and traders began to price in the chance that the Fed’s next move would be a rate increase. More recently, the market has held back on committing to strong wagers in either direction.

The US central bank cut interest rates three times last year in response to weakness in the job market. They paused the cuts in January, citing improvement on that front. Since then, the US Labor Department’s monthly jobs report for January was stronger than anticipated, while February data showed weakness.

The March report – which showed nonfarm payrolls rose by the most since the end of 2024 – is unlikely to change much for US policymakers, Thomas Simons, chief US economist at Jefferies, wrote in a note to clients. 

“The data is mostly backward looking, and likely does not incorporate any impact from the recent rise in energy prices, or other risks related to the war in Iran,” he wrote. “For now, there is nothing here that suggests they need to act soon.”

Defensive market

A pileup of short positions that had recently built into Treasuries has been diluted over recent sessions as traders hedge against growth shocks from short-term inflationary pressures. In Treasury options, there has been demand for protection against a decline in yields heading into the weekend as traders prepare for a potential gap lower when the cash market reopens on Monday. 

Guneet Dhingra, head of US interest rate strategy at BNP Paribas, said the mostly parallel increase in yields after Friday’s data illustrated a mindset shift away from expecting the Fed to raise rates. 

Comparable data “two weeks ago would’ve caused significant flattening” as the market priced in a higher likelihood of Fed tightening, he said. “It reveals a lot about curve positioning in the market being close to neutral for the first time in four years”, during which there’s been a structural steepening bias.

He – and others on Wall Street – expect the focus to turn in the market away from the war-linked risk of inflation and more toward an eventual hit to growth from elevated energy prices. That shift stands to support Treasuries, especially with yields lingering not too far from their highest levels of the year. 

The 10-year yield ended Friday around 4.34 per cent, down from a year-to-date peak of 4.48 per cent touched a week earlier. Yields on two-year notes were up four basis points on the day to 3.85 per cent when the session ended at noon New York time. The dollar rose against major peers.

“Front-end yields are unlikely to go up with growth concerns lurking,” while fiscal risks “are very underpriced at the long end, which is why we think long-end yields are going to go higher”, Dhingra said.

Ahead of the employment report, JPMorgan Chase & Co interest rate strategists advised taking profit on a Mar 20 recommendation to buy two-year Treasuries at 3.891 per cent in case a strong reading eroded expectations for a Fed rate cut this year. BLOOMBERG