Treasuries experienced a significant surge on Friday following a surprisingly weak US payroll report, triggering a wave of buying after a month of bond losses. The jobs data, which included substantial downward revisions that trimmed 258,000 jobs from figures in May and June, prompted traders to increase their bets on Federal Reserve interest-rate cuts. Futures are now pricing in an 84 per cent probability of a rate reduction next month and at least two cuts by the end of the year.
The weaker-than-expected data fuelled a rally across all maturities, with the most pronounced move occurring in the short end of the curve. Two-year notes, which are particularly sensitive to interest rate changes, led the charge, with yields plummeting by more than a quarter of a percentage point. This was the largest single-day decline since December 2023. The shift resulted in a widening gap between short- and long-dated debt yields, providing profits for those who had bet on the steepening trend.
This steepening strategy had been underperforming since April, becoming a losing proposition for much of July and leading many investors to unwind their positions. The cost of financing such positions played a significant role, as a consistent steepening trend is necessary to justify the expense. However, Friday’s surge provided vindication for those who maintained or re-established their positions in July, potentially signalling further gains ahead.
