The unexpected drop in the US unemployment rate has shaken short-term easing expectations, causing US bond yields to rise across the board. Traders are still pricing in two interest rate cuts this year.

After the unemployment rate in the United States fell more than market expectations in December, U.S. Treasury bonds fell across the board on Friday, with traders all but erasing bets on a rate cut by the Federal Reserve later this month. As bond prices fell, yields on U.S. Treasuries of various maturities generally rose, with the highest increase being around 3 basis points. Despite the significantly reduced expectations for a rate cut in the short term, bond traders still maintain the judgment that there will be two rate cuts in 2026 as a whole, with the first rate cut possibly occurring around the middle of the year. Robert Tipp, Chief Investment Strategist at PGIM Fixed Income, said in an interview that this data does not change the overall direction of gradual rate cuts by the Federal Reserve. "This still fits with the Fed's path of slowly lowering the federal funds rate this year," he pointed out, noting that rates are now close to or at the upper end of the neutral range, and policymakers may feel that monetary policy has limited restraining effects on the economy, so they "could easily skip a meeting." The employment data is seen as an important window to observe trends in the U.S. labor market. Previously, due to a six-week shutdown by the U.S. government from October 1 to November 12, the labor reports for September, October, and November were delayed, leading to a lack of clear basis for market judgments on the employment situation. Market participants generally believe that whether there will be further rate cuts in the future will depend on the performance of the labor market in the coming months. Although the Fed has lowered short-term rate targets in the past three meetings due to weakness in the job market, some officials still express concerns about inflation being above the policy target, which is believed to limit the pace of further easing. John Briggs, Head of U.S. Rate Strategy at Natixis North America, pointed out that the Fed will pay more attention to the unemployment rate itself rather than short-term noise in the employment data, "In my view, this is slightly bearish for U.S. bond rates." Looking back at the performance throughout the year, U.S. Treasuries rose by over 6% last year, marking the best annual performance since 2020, mainly benefiting from expectations of cooling in the job market. After the latest data release, traders are currently pricing in the next rate cut in June, one month after Fed Chair Powell's term ends, and policy may loosen again in the fourth quarter. Strategists believe that the detailed data on employment structure in December still shows signs of potential weakness in the labor market, to some extent offsetting the negative impact of the decline in the unemployment rate on the bond market. At the same time, the uncertainty of tariff policy has become another focus of the bond market. The market is closely watching the outcome of the ruling on the legality of President Trump's tariffs. If the court rules that the tariffs are not legal, it may put pressure on U.S. Treasuries. Previously, these tariffs brought in billions of dollars in fiscal revenue for the U.S. and partially relieved budget deficit pressures. Strategists at J.P. Morgan, such as Jay Barry, pointed out in a report released this week that if tariffs are canceled, it may reignite concerns about the fiscal situation in the market, leading to higher long-term yields and a steepening of the yield curve. However, they also believe that since the government can still restore most of the tariffs through other means, the actual impact on the bond market may be relatively limited.