US Two-Year Treasury Yields Rise as December Jobs Data Reduces Rate Cut Expectations
Two-year Treasury yields rose to 3.534% after December jobs data showed 50,000 new jobs (below 60,000 forecast) but unemployment falling to 4.4% (better than 4.5% expected). This mixed data reduced Fed rate cut expectations for January to just 4.8% probability. Fed officials maintained cautious stance on rate cuts amid inflation concerns and labor market uncertainties, while mortgage rates declined following Trump's $200 billion mortgage bond purchase announcement.
*this image is generated using AI for illustrative purposes only.
Two-year Treasury yields climbed on Friday after December employment data presented a mixed picture that reinforced expectations the Federal Reserve will maintain current interest rates at its upcoming January meeting. The yield-sensitive securities rose as investors recalibrated their rate cut expectations following the jobs report.
December Employment Data Shows Mixed Signals
The December jobs report revealed contrasting trends in the labor market. Employers added 50,000 jobs during the month, falling short of the 60,000 new positions economists had forecast. However, the unemployment rate declined to 4.4%, beating expectations of 4.5%.
| Employment Metric: | December Result | Economist Forecast |
|---|---|---|
| Jobs Added: | 50,000 | 60,000 |
| Unemployment Rate: | 4.4% | 4.5% |
Jonathan Cohn, head of U.S. rates desk strategy at Nomura, characterized the report as "decent" and noted it suggested "neither re-acceleration nor material slowing." He attributed part of the unemployment rate decline to the impact of government shutdown effects and furloughed employee reporting.
Fed Rate Cut Expectations Diminish
The employment data significantly reduced market expectations for immediate Fed action. Fed funds futures traders now price in only a 4.8% chance of a rate cut at the Federal Reserve's January 27-28 meeting, down from 11.6% before the data release. Market participants do not expect the next rate cut before April at the earliest.
| Rate Cut Probability: | Current | Pre-Data |
|---|---|---|
| January Meeting: | 4.8% | 11.6% |
| Next Expected Cut: | April or later | - |
The Federal Reserve cut rates last month but signaled borrowing costs are unlikely to drop further in the near term as policymakers await clarity on labor market direction, inflation trends, and economic momentum.
Treasury Yield Movements and Market Response
The two-year Treasury note yield, which typically moves in alignment with Fed rate expectations, rose 4.6 basis points to 3.534% and reached 3.543%, the highest level since December 23. The benchmark 10-year note yield fell 1.4 basis points to 4.183%, briefly touching 4.211%, the highest since September 4.
The yield curve between two- and 10-year notes flattened by approximately 5 basis points to 63 basis points, reflecting the market's adjustment to changing rate expectations.
Fed Officials Express Continued Caution
Federal Reserve officials reinforced their cautious stance on monetary policy. Richmond Fed President Tom Barkin described December job growth as "modest" and noted that firms outside healthcare and artificial intelligence-related industries remain reluctant to hire.
Atlanta Fed President Raphael Bostic emphasized that inflation issues remain at the forefront of his economic concerns, describing the job market as being in a "low-hire, no-fire mode" amid broader uncertainties.
Housing Market Developments
Bonds rallied briefly after President Trump announced plans to order representatives to buy $200 billion in mortgage bonds to reduce housing costs. Federal Housing Finance Agency Director Bill Pulte confirmed that Fannie Mae and Freddie Mac will execute the purchases.
Thirty-year mortgage rates fell 22 basis points to 5.99% following the announcement, according to Jefferies analyst Matthew Hurwit, though he noted consensus expectations already anticipated a decline toward 5.9% by year-end.
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