US Treasuries plunged as evidence of a resilient labor market pushed traders to shift their expectations for the Federal Reserve’s next interest-rate cut to the second half of the year.
Sparked by a report showing US employment in December grew the most in nine months, the selloff sent the 30-year bond’s yield above 5% for the first time in more than a year. Ten-year yields rose to the highest since 2023, while those on notes maturing in two to seven years all rose by more than 10 basis points before retreating from their peaks.
“Looks like a really strong report across the board, pushing yields higher and the curve flatter,” said Zachary Griffiths, head of investment-grade and macroeconomic strategy at CreditSights. “It’s causing a more material repricing of near-term Fed expectations, resulting in the more conventional bear flattener.”
Swaps traders are pricing in about 30 basis points of Fed rate cuts this year, compared to about 38 basis points before the jobs data. A quarter-point reduction is fully priced for around September, vs around June before the report. It was briefly pushed out to as far as October.
US yields have climbed some 100 basis points since the Fed began cutting interest rates in September, with policymakers in December making clear they were eager to slow down the pace of reductions.
Read more: Long-Bond Futures Block Buy Looks to Fade 30-Year Yields at 5%
Nonfarm payrolls increased 256,000, exceeding all but one forecast in a Bloomberg survey of economists. The unemployment rate fell to 4.1%, while average hourly earnings rose 0.3% from November, a Bureau of Labor Statistics report showed Friday.
After the data, economists at Bank of America said the Fed’s monetary policy easing campaign is over, and laid out the risk that officials’ next move is a rate increase. Citi economists also shifted their expectations for the path of rates, forecasting the next cut in May rather than January previously.
“We believe that the unemployment rate is the most important number from the employment report, followed closely by average hourly earnings — as we see the Fed on hold as long as the unemployment rate is between 4% and 4.5%,” said Earl Davis, head of fixed income at BMO Global Asset Management. “They will resume easing at 4.5% and start hiking if it drops below 4%.”
Friday’s report confirms the labor market held up last year despite high borrowing costs, lingering inflation and political uncertainty. A separate report on consumer sentiment, compiled by the University of Michigan and released later Friday, found that long-term inflation expectations jumped to the highest since 2008 this month. The increase was linked the tariff agenda of President-elect Donald Trump, who takes office Jan. 21.
The data raises the stakes for inflation gauges to be released next week. December consumer price index data to be released Jan. 15 are forecast to show a third straight month of acceleration, to a rate of 2.9%.
Inflation-protected Treasuries suffered smaller losses, resulting in higher market-implied expectations for the CPI growth rate over the next five years. The yield differential between five-year inflation-protected and regular Treasuries — which represents the expected average CPI rate — topped 2.5% for the first time since April.
Yields at 5%
The 30-year yield’s breach of 5% marks an important milestone for the $28 trillion Treasury market, which has been under pressure alongside global bonds as investors grow uneasy about the prospect of persistent inflation and rising debt loads.
Longer-maturity bonds have been hit hardest, resulting a steeper yield curve. The 20-year bond, a laggard on the US government debt curve since its re-introduction in 2020, topped the 5% level earlier this week for the first time since 2023.
Trump’s tariff and tax-cut vows meanwhile have fanned concern about global trade and the US’s ability to keep rolling over its swelling debt load without investors demanding higher payouts. And the UK 10-year yield recently hit the highest since 2008 in an echo of the rout that ended Liz Truss’s brief stint as prime minister in 2022.
Firms including Amundi SA, T. Rowe Price and ING are warning that 10-year notes could be the next to hit the 5% level. Some options traders are already targeting a move toward that key threshold. Ten-year yields rose more than nine basis points on Friday to as high as 4.79%.
“We are unequivocally in the buy zone,” Michael Collins, executive portfolio manager at PGIM Fixed Income, said on Bloomberg Television just before the job figures were reported. “Rates have backed up a lot. The long-term value in the fixed-income markets is in the government bond component.”
The 10-year yields last reached 5% in October 2023. A swift decline followed after the Treasury Department slowed the increase in auction sizes of long-term debt and the Fed signaled the most aggressive tightening cycle in decades was coming to an end as inflation cooled.
That rally helped the Treasury market return 4% in 2023, following a record loss of 12% the previous year. The bond market gained 0.6% in 2024, though it’s down about 0.4% so far in 2025.
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