Key Points
10-year Treasury yield fell from 4.65% to 4.47% as oil prices stabilized and rate-cut bets faded.
May jobs report expected to show 85,000 payroll growth, slowest in three months, could trigger bond rally.
Swap markets price 70% probability of Fed rate hike by year-end 2026 as inflation remains above 2% target.
High-yield bond funds attract steady inflows despite broader market uncertainty over Fed policy direction.
US Treasury traders have bet heavily on Federal Reserve rate hikes over the next 12 months. But May employment data released June 5 could upend that trade. The 10-year yield fell from 4.65% to 4.47% as oil prices stabilized and inflation concerns eased. Weak jobs numbers could force bond prices higher and shift market expectations toward rate cuts instead.
Why Bond Traders Are Hedging Their Bets
Since late February, when the US attacked Iran and oil spiked, traders abandoned bets on Fed rate cuts. The market consensus shifted to expect rate hikes instead. Swap markets now price in a 70% chance of a 0.25 percentage point rate hike by year-end 2026. But some option investors are reducing risk ahead of the jobs report, signaling uncertainty about this outlook.
The Jobs Report Could Flip the Script
Bloomberg economists expect May non-farm payroll growth of 85,000 jobs, the slowest in three months. If actual numbers fall short, bond prices could surge and yields would drop further. Bryce Doty, a bond fund manager at Schott Investment Associates, said weak data would be the most painful scenario for traders who sold bonds at 4.65% yields. Strong data would push yields slightly higher, but weak data offers the biggest upside for bond bulls.
Fed Policy Uncertainty Clouds the Outlook
The Federal Reserve’s policy rate sits at 3.5-3.75% and has been unchanged since December 2025. Multiple Fed officials say they cannot support rate cuts while inflation exceeds the 2% target. Yet if employment slows, the analysis becomes more complex. The next Fed meeting on June 16-17 will be chaired by new Fed Chair Kevin Warsh, adding another layer of uncertainty to market expectations.
High-Yield Bonds Attract Steady Inflows
Despite broader bond market uncertainty, high-yield bond funds received inflows while investment-grade bonds saw mixed flows. Leveraged loan funds drew 755.5 million USD in the latest week, marking nine consecutive weeks of inflows. This split suggests investors are still hunting for yield in riskier assets even as rate expectations shift.
Final Thoughts
The May jobs report will determine whether bond traders hold their rate-hike bets or pivot to rate-cut expectations. Weak employment data could trigger a sharp bond rally and yield compression, punishing traders positioned for higher rates.
FAQs
Weak employment data typically pushes bond prices higher and yields lower, making bonds more attractive and potentially triggering rate-cut expectations from the Federal Reserve.
Oil price stabilization eased inflation concerns, while Fed officials signaled limited rate-cut room as long as inflation remains above 2%, reducing rate-hike expectations.
Swap markets price in a 70% probability of a 0.25 percentage point rate hike by end-2026, with most Wall Street banks removing 2026 rate-cut forecasts.
Disclaimer:
The content shared by Meyka AI PTY LTD is solely for research and informational purposes. Meyka is not a financial advisory service, and the information provided should not be considered investment or trading advice.
About Author
Danny Kontos
Co FounderDanny Kontos has been a stock investor since 2007 and co-founded Meyka in 2023. He keeps a small, focused portfolio and only moves when the numbers are hard to argue with. He has waited years on a single position before. Before Meyka, he ran a web hosting company and a mortgage lending platform, so he knows what a well-run business actually looks like under the hood. This article did not come from a news cycle. It came from someone who has been watching this space for a long time.
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