Weak employment data triggers a "safe haven tsunami"! US Treasury yield posts biggest drop in several months, rate cut expectations brought forward to June.

The signs of weakness in the U.S. job market have intensified the decline in U.S. stocks, commodities, and cryptocurrencies, prompting investors to increase their bets on the Federal Reserve's loose policy. U.S. bonds have risen sharply, with yields posting the biggest decline in several months. Data shows that on Thursday, short-term U.S. bonds, which are more sensitive to expectations of Federal Reserve policy, led the way. The yield on two-year U.S. bonds fell 9 basis points to 3.46%, the lowest level since January 8 and the largest single-day decline since October last year; the yield on three-year and five-year U.S. bonds also fell significantly. The decline in the yield on the ten-year U.S. bond was relatively small, at one point widening the difference between the two-year and ten-year U.S. bond yields to close to 73 basis points, reaching the widest level since April last year and approaching the steepest level since 2022. After the release of the job market data on Thursday, the forward market incorporated more expectations of Federal Reserve easing. Economic data shows a surge in announced job cuts by U.S. companies, an increase in initial claims for unemployment benefits, and a decrease in job vacancies. Traders have brought forward expectations for the next Fed rate cut from July to June and expect a second rate cut before October. At the same time, the continuation of the sell-off of tech stocks in the U.S. has prompted investors to turn to U.S. bonds for safety. Risk aversion has also boosted the dollar, with the dollar index poised for its first weekly gain in four weeks and closing at a two-week high. Sean Simko, head of fixed income investment management at SEI Investments Corp., said, "The job data is the spark, but the market has been fully priced for a while now, and cracks are starting to show. This is creating a risk-off environment, and we are seeing this happening across multiple sectors." Win Thin, chief economist at Bank of Nassau 1982, said, "The stronger dollar isn't because the U.S. economy is performing well, but rather more like a pure risk aversion behavior, as stocks, cryptocurrencies, silver, and other risk assets are all falling." Data released by the Labor Department on Thursday showed that seasonally adjusted initial jobless claims in the U.S. surged by 22,000 to 231,000 people in the week ending January 31, exceeding economists' expectations of 212,000 people. In addition, job vacancies in the U.S. fell to 6.542 million in December, the lowest since September 2020 and significantly lower than the market's expectations of 7.25 million; the November data was revised down from 7.146 million to 6.928 million, indicating a continued weakening in labor demand by the end of 2025. According to data from outplacement company Challenger, Gray & Christmas Inc., the number of job cuts announced by U.S. companies in January hit the highest level since the depths of the Great Recession in 2009. Last month, companies announced 108,435 job cuts, an increase of 118% from the same period last year. The report also showed that hiring intentions fell 13% year-on-year to 5,306 people - the weakest January hiring data on record for the organization since 2009. Ian Lyngen, head of rate strategy at BMO Capital Markets Corp., said the data "has changed the market tone and weakened expectations for the official non-farm payrolls report next week." Due to a brief government shutdown, the release of the January non-farm payrolls report has been postponed from this week to February 11, and the release of the January Consumer Price Index (CPI) data has been delayed to February 13. Federal Reserve easing bets Short-term rate contracts show that the market is pricing in the probability of another action by the Federal Reserve before the middle of the year - when Kevin Warsh, nominated by President Trump, will take over as Fed chair from Powell. The Fed paused rate cuts this month, citing signs of stability in the labor market. Chris Ahrens, strategist at Stifel Nicolaus & Co., said, "The market currently sees the Fed as being on hold. If we start to see some softness in the labor market data, the market will at least consider the possibility of another rate cut in the last few months of Powell's term." He also pointed out that while the stock market has seen quite aggressive rotation, the bond market has been relatively calm until now, but that seems to be changing. Earlier in the day, UK government bonds rose sharply following the Bank of England's interest rate decision, also providing support for U.S. bonds. The Bank of England decided to keep rates unchanged with a split vote, with a minority of members supporting a rate cut.