US Treasury Rally Pauses Amidst Hefty Bond Sales and Speculation of Rate Cuts

The US Treasury yield on 10-year debt rose 3 basis points to 4.25%, halting its rally, ahead of a $125 billion bond sale this week. The two-year yield also rose 3 basis points, while money markets assign an almost 80% chance of a Fed rate cut in September. The bond rally has turned into a payoff for investors who bet on the gap between short- and long-dated debt widening.

The US Treasury yield on 10-year debt rose 3 basis points to 4.25%, halting its rally ahead of a $125 billion bond sale this week. The two-year yield also increased by 3 basis points, while money markets assign an almost 80% chance of a Federal Reserve rate cut in September. The bond rally has turned into a payoff for investors who bet on the gap between short- and long-dated debt widening.

Just when bond investors were doubting one of their favorite strategies, it’s making a comeback. Treasuries surged on Friday as a surprisingly weak US payroll report unleashed a frenzy of buying following a month of bond losses. The data, including downward revisions that trimmed a whopping 258,000 jobs from the tallies in May and June, sent traders piling into fresh wagers on Federal Reserve interest-rate cuts, with futures pricing in 84% odds of a reduction next month and at least two cuts by year-end [1].

“We’re now looking at a completely different labor market backdrop,” said Kevin Flanagan, head of fixed income strategy at WisdomTree. “There’s nothing like a downward revision of a quarter million people to change the story” [1].

The shock factor of the data extended the rally across all maturities, but the major move was in the short end. Leading the action were rate-sensitive two-year notes, whose yields slid by more than a quarter point for their biggest one-day decline since December 2023. This led to a widening gap between yields on short- and long-dated debt, handing profits to anyone betting on the so-called steepening trend [1].

It’s a strategy that had largely been languishing since April, and it was a money-losing pain trade for much of July, causing many to unwind it. Playing a key part was the cost of financing the position: Because it’s expensive to maintain, a consistent steepening trend is needed to make holding such a wager worth it. But inconclusive economic data and uncertainties around tariffs left the market without a catalyst [1].

For those who stayed in the trade, or even reloaded in July, Friday was vindication and a potential prelude to further gains. “We still like the steepening view and so are pleased to see the price action,” said Mark Dowding, chief investment officer of the BlueBay Fixed Income unit at RBC Global Asset Management, who is betting on a wider gap between yields on two- and 30-year debt [1].

On Friday, that spread had its biggest one-day rise since April 10, as traders rushed to reestablish positions that would favor a steepening yield curve under a scenario of Fed rate cuts. Futures volumes in early New York trading were running at around three times usual and even greater in contracts that track policy expectations [1].

The rush into Treasuries on Friday — which also came amid a sharp slump in stocks and other risk assets — marked an abrupt turnabout from earlier last week, when bond traders spent much of their time cutting back their exposure, and wrapped up July with losses [1].

In particular, investors keyed in on a hawkish message Wednesday from Federal Reserve Chair Jerome Powell, who characterized the labor market as being “in balance” and preached patience in the face of still generally solid economic data and inflation that is running slightly hotter than the central bank would prefer [1].

“Powell basically ruled out a September rate cut — he gave the green light that you could be short at least the front end,” said Tony Farren, managing director in rates sales and trading at Mischler Financial Group. But the jobs number was so weak, investors were forced to cover their positions, he said [1].

The July jobs figures provide supporting evidence for those — including dissenting Fed Governors Christopher Waller and Michelle Bowman, not to mention US President Donald Trump — who believe the central bank should already be cutting rates by now. Meanwhile, Trump, who has stepped up pressure on Powell over his failure to cut rates, further rattled shaky markets on Friday by calling for the firing of the commissioner of the Bureau of Labor Statistics, accusing her of politicizing the employment report [1].

As the dust settles, traders will have to ascertain how much of Friday’s rally is a function of the negative sentiment that was weighing on Treasuries in the lead-up to the employment report. The challenge for bond bulls is whether the deteriorating jobs picture is a forewarning of a much weaker economy that would obviate the danger of higher tariff-induced inflation in the next few months [1].

And it’s only one number: Still ahead are two months of key economic data before the next Fed policy meeting, including a pair of inflation reports and another payroll reading [1].

References:
[1] https://www.bloomberg.com/news/articles/2025-08-03/bond-market-s-pain-trade-turns-to-payoff-on-jobs-shock
[2] https://www.tradingview.com/news/te_news:474865:0-jgb-yields-fall-in-tandem-with-us-treasury-yields/
[3] https://finance.yahoo.com/news/chances-fed-interest-rate-cut-010300703.html