US Treasuries Slide as Solid Jobs Market Gives Fed Room on Rates

The US labor market’s resilience in April 2025, highlighted by a 177,000 increase in nonfarm payrolls and a stable 4.2% unemployment rate, has reignited debates over Federal Reserve policy and its implications for Treasury markets. Against this backdrop, US Treasuries have faced downward pressure, with the 10-year yield rising to 4.21% by late April—marking a delicate balancing act between economic strength and fiscal risks.

Labor Market Strength Fuels Fed Policy Uncertainty

The April jobs report, released in early May, underscored the economy’s stubborn vitality. Health care added 51,000 jobs, transportation and warehousing surged by 29,000, and financial activities grew by 14,000, offsetting declines in federal government employment. The unemployment rate’s stagnation at 4.2%—a level unseen since 2000—signaled no immediate recessionary pressures, even as long-term unemployment rose to 23.5% of the total.

This data emboldened the Fed to maintain its stance of pausing rate cuts, at least through the May meeting. Markets, however, remain divided: while the central bank holds firm, investors continue to price in 90 basis points of rate cuts by year-end, with the first reduction expected in July. This disconnect has fueled volatility, particularly in the Treasury market.

Treasury Yields: Navigating Contradictory Forces

The 10-year Treasury yield’s climb to 4.21% by April 28 reflects a tug-of-war between economic fundamentals and geopolitical risks. Key dynamics include:
1. Labor Market Optimism: The jobs report’s “above-consensus” payroll gains (133,000 was the estimate) signaled that the Fed’s patient approach remains justified. This reduced near-term easing expectations, supporting yields.
2. Tariff-Driven Uncertainty: President Trump’s “Liberation Day” tariffs, though not yet fully felt in economic data, introduced inflationary risks. The 2-year breakeven inflation rate spiked to 3.36% in early April, as traders priced in potential goods price pressures.
3. Term Premium Pressure: Concerns over Treasury demand stability—driven by fiscal deficits and debt limit negotiations—pushed investors toward shorter-dated maturities, widening the yield curve.

Inflation: A Double-Edged Sword

While core PCE inflation eased to 2.8% year-over-year in February, the Fed’s focus on separating goods (potentially declining due to inventory adjustments) and services (sticky wages remain a wildcard) complicates the outlook. Wage growth, at 3.8% annually, remains elevated, but the 0.2% monthly rise in average hourly earnings suggests moderation.

Analysts like JPMorgan’s Priya Misra argue that recession risks (60% probability) could still push yields lower, while Invesco’s Rob Waldner warns that fiscal deficits—driven by tax cuts and recession-driven spending—could sustain elevated yields.

Fiscal Risks and the “Safe Haven” Dilemma

The Treasury market’s role as a “safe haven” has been tested. Intraday volatility in the 10-year yield reached 184 basis points from April 1–28, reflecting anxiety over unresolved debt limit negotiations and foreign demand for US debt. BNY Wealth’s John Flahive notes that tariff-driven inflation could further strain the Treasury market, especially if China reduces holdings due to shrinking trade deficits.

The Path Forward

Investors face a critical question: Can the Fed’s patient stance and labor market strength sustain higher yields, or will recession risks and term premium normalization push yields lower? The April jobs report has tilted the scales toward the former, but risks remain.

• Technical Picture: The 10-year yield’s proximity to its long-term average of 4.25% suggests a battleground between bulls and bears. A sustained break above 4.5% would signal inflation fears, while a drop below 4.0% would reflect recession concerns.
• Policy Crossroads: The Fed’s May meeting could clarify the path—hawkish comments would lift yields, while dovish signals would depress them. Meanwhile, tariff impacts and debt limit outcomes will shape fiscal uncertainty.

Conclusion

The April jobs report has handed the Fed a reprieve from aggressive easing, allowing it to prioritize inflation over growth. This has pressured Treasuries, with the 10-year yield hovering near 4.21% as of late April. However, the market remains hostage to contradictory forces: a resilient labor market vs. tariff-driven inflation, fiscal deficits vs. recession risks.

For investors, the calculus is clear:
- Short-term traders might bet on yield stability or a modest rise to 4.3%–4.5%, leveraging sector strength (e.g., transportation’s 29,000 jobs).
- Long-term holders should prepare for volatility, with term premiums and geopolitical developments (e.g., trade negotiations) likely to dominate.

As Gary Alexander would note, the Treasury market’s next move hinges on whether the Fed’s patience outweighs the storm clouds on the horizon—or vice versa.