(Nov 6): Treasuries dipped after an unexpected surge in US job growth led traders to add to wagers that the Federal Reserve (Fed) will raise interest rates when officials next meet in December.

The declines on Friday pushed yields higher across maturities, with those on two-year notes — more sensitive to the outlook for the Fed’s rate path than longer peers — rising as much as seven basis points to 4.54%. The reaction faded quickly, however, leaving yields higher by one to six basis points, about where they were just before the data, which showed the US added 165,000 jobs in October, topping forecasts.

Traders maintained expectations for further rate increases by the US central bank, pricing in a roughly 80% chance of a quarter-point hike next month. All told, the market expects at least 40 basis points of additional tightening by September 2027. 

The market’s relatively muted reaction to the data shows that “traders are wary of how equities will take this”, said John Briggs, head of US rates strategy at Natixis North America. “The market is clearly at the moment caught between risk-off flight-to-quality and an economy that continues to show resilience.”

Heading into the jobs report, Treasuries had erased a portion of this week’s steep gains that were driven by haven demand. The Democratic sweep of Congress in Tuesday’s US midterm elections escalated concerns around the sustainability of capital spending on artificial-intelligence infrastructure, and investors flocked to bonds as shares of large technology companies slumped. 

A rotation from stocks to bonds that began a month ago intensified Thursday, sending the two-year yield below 4.5% and the 10-year towards 4.80%, the lowest levels since early September. Yields rebounded from those levels Friday before the jobs data as stock index futures pointed to gains for the cash market when it opens. 

Non-farm payrolls rose 165,000 last month, beating a forecast gain of 65,000, and the unemployment rate dipped to 4.1%. Revisions for prior months were positive and wage growth also picked up to 3.1% for the past year.

The jobs “print leaves room for rates to back up if we shift back towards focusing on the fundamentals rather than seeing the move lower with the safe haven bid”, said Molly Brooks, US rates strategist at TD Securities. “If risk markets start to view strong data as bad news with expectations for higher rates, this could dampen some of the move higher in rates as flight to quality comes back into play.”

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