Traders Embrace September Fed Rate Cut Amid Job Market Weakness

Elizabeth Stanton and Liz Capo McCormick

Thu, Jun 5, 2025, 6:29 AM 2 min read

(Bloomberg) -- Bond traders priced in an earlier start to expected Federal Reserve interest-rate cuts on fresh clues the US job market is losing momentum.

Most Read from Bloomberg

• ICE Moves to DNA-Test Families Targeted for Deportation with New Contract

• The Global Struggle to Build Safer Cars

• NYC Residents Want Safer Streets, Cheaper Housing, Survey Says

• The Buffalo Architect Fighting for Women in Design

• US Housing Agency Vulnerable to Fraud After DOGE Cuts, Documents Warn

They anticipate the Fed will lower rates as soon as September, versus October previously, while continuing to fully price in at least one additional quarter-point cut by year-end.

With more comprehensive May employment data to be released Friday, an unexpected increase in new jobless claims sparked the repricing of swap contracts tied to Fed policy shifts. The US Treasury market rallied in tandem, following its biggest daily advance in two months on Wednesday, also in response to a weak job-market indicator.

“The economy is slowing,” Krishna Memani, chief investment officer for Lafayette College, said on Bloomberg Television. “The hard data is softening. There is a substantial trend for slowing in the economy” that “gives the Fed the path to cut rates, not today, but in the later half of the year.”

The decline in swap rates and Treasury yields stalled as US stock index futures rallied after reports US President Donald Trump and Chinese President Xi Jinping held their first official phone call since Trump took office in January. Trade tensions between the world’s two largest economies have caused bouts of risk aversion and capital flows from stocks into bonds.

Also, short-term German yields jumped to a two-week high after European Central Bank President Christine Lagarde suggested it was possible that the central bank may revise its growth forecast higher in the future.

The two-year Treasury yield, most sensitive to Fed policy expectations, was back to little changed after falling as much as four basis points, while long-maturity tenors held small gains.

As measured by the Bloomberg Treasury Index, Wednesday’s gain — sparked by a sub-par gauge of private-sector job growth — was the biggest since April 3. Futures open-interest data released after the close indicated new long positions were set, and the 10-year note contract’s price reached a level that was likely to cause shorts to cover, interest-rate strategists at Citigroup said.

Weekly data on jobless claims showed an unexpected increase that refocused investor attention on the prospect that the Fed will act to prevent further labor-market erosion, even as short-term inflation expectations have picked up based on the Trump administration’s tariff’s agenda.