The latest U.S. employment data for September shows that the job market is cooling off. Non-farm payrolls increased by only 29,000, below economists’ expectations of about 90,000, and the unemployment rate rose to 4.2%. The total number of additional jobs in July and August was revised downward by 60,000. Traditionally, this should be good news for the bond market: with the economy slowing down and employment weakening, it may alleviate inflationary pressure, making it unnecessary for the Federal Reserve to continue raising interest rates and potentially even giving it more room for rate cuts.
After the release of the employment data, U.S. Treasury bond yields initially fell, the dollar weakened, and the stock market received a boost. However, later on, U.S. bond yields rose again. According to Reuters, the bond market’s concerns are not just about whether the Federal Reserve will raise interest rates at the next meeting. Before and after the release of this employment report, global bond markets have experienced severe sell-offs.
The yield on U.S. 10-year Treasury bonds briefly rose to 5.34%, reaching its highest level since 2002; the 30-year bond yield in the UK exceeded 6%, France’s 10-year bond yield approached 5%, and Japan’s long-term bond yield also rose to multi-year highs.
Long-term interest rates reflect not only the decisions of the next central bank meeting but also the revaluation of investors regarding future inflation, government finances, bond supply, and term risks.
The market’s focus is not only on “when will the Fed cut interest rates,” but also on a longer-term question: even if the Fed cuts rates in the future, can long-term rates return to the low levels of the past decade?
From 2015 to 2021, the average annual yield on U.S. 10-year Treasury bonds mostly ranged from 1% to 3%, dropping to 0.89% in 2020 at one point. Since then, yields have significantly increased, with average yields in 2024 and 2025 reaching 4.21% and 4.29%, respectively. In early October this year, the yield on 10-year U.S. bonds briefly rose to 5.34%, the highest level since 2002.
Rising energy prices are particularly noteworthy, as they are not solely due to overheated demand. From late September to early October, Brent crude oil prices briefly surpassed $100 per barrel. Energy costs have once again become one of the global inflation risks. Reuters reports that high energy prices, along with factors like government spending, economic activity, as well as investments in artificial intelligence and data centers, are exacerbating market concerns about inflation.
Increased oil prices may raise the costs of transportation, logistics, manufacturing, and certain goods and services. Central banks can curb demand by raising interest rates but cannot directly increase oil supply. Therefore, if energy prices remain high, central banks may face more complex policy choices: the economy is already starting to slow down, but inflationary pressures are limiting the space for rate cuts.
Another core issue in the global bond market this time is fiscal policy. The United States is not the only country increasing government borrowing. Major economies in Europe, Japan, the UK, and others are also facing significant pressures from fiscal expenditures and debts.
When governments need to issue a large amount of long-term Treasury bonds, it means that the market needs to absorb more bonds. If investors believe that future inflation, fiscal deficits, or uncertainty in government debts are rising, they may demand higher yields to hold longer-term bonds.
This is related to the so-called “term premium.” Simply put, the longer the term of the Treasury bonds investors hold, the greater the uncertainties they face related to inflation, fiscal policy, and economic environment changes, leading them to potentially require higher yields as compensation. Dallas Fed President Lorie Logan stated on October 1 that the recent significant rise in long-term bond yields is believed to be initially related to strong expectations of nominal economic growth and higher neutral interest rates; some model analyses also indicate that higher term premiums have played a role.
Therefore, even if the Fed begins to cut rates in the future, the yield on 10-year U.S. Treasury bonds may not necessarily decrease significantly in sync. Short-term policy rates and long-term bond yields are increasingly reflecting different market factors.
The focus in the market will now shift to the U.S. Consumer Price Index (CPI) for September, to be released on October 14, and the Producer Price Index (PPI) to be released on October 15. According to Reuters analysis, these data sets will further help the market determine whether the cooling of employment will translate into lower inflationary pressures.
If U.S. employment continues to remain weak in the coming months, and energy prices fall, inflationary pressure may gradually decrease, and the policy space for the Federal Reserve may increase. However, if another scenario occurs: job growth continues to slow, oil prices remain high, fiscal deficits and bond supply continue to increase, central banks may face more complex policy decisions.