Shorter-term Treasuries, which are most sensitive to expectations for Fed policy, led the slump. Two-year yields rose almost 10 basis points, while 10-year rates jumped 6 basis points to 4.34%. The dollar advanced versus its major counterparts.
"The Fed will take the summer off," said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. "The needle for the Fed to move was employment" and this report gives Fed Chair Jerome Powell room for a wait-and-see approach to easing policy.
Interest-rate swaps showed traders saw almost no chance of a Fed rate reduction at the July 29-30 meeting, compared with the roughly 25% probability seen before the report. The chance of a move in September was reduced to about 75%.
Payrolls increased 147,000 after slight upward revisions to the prior two months, and compared with a median forecast of 106,000 in a Bloomberg survey. The unemployment rate fell to 4.1%, from 4.2%.
But private payrolls rose just 74,000 in June, the least since October and largely due to health care. The figures are consistent with a moderation in hiring as employers grapple with President Donald Trump's erratic trade policy and await congressional approval of his signature tax legislation.
Jeffrey Rosenberg, portfolio manager at BlackRock Inc., said investors may have overreacted given the slowdown in private payrolls.
"This is a great example of where the first reaction is not necessarily the last reaction," Rosenberg said on Bloomberg Television. "Private payrolls disappointed to the downside. This is the slowing in the job market that we're expecting."
Treasuries had rallied in recent weeks, bringing the 10-year benchmark down from around 4.6% in May, on expectations that a softening labor market would give policymakers the data they need to resume monetary easing.
The market started to entertain the probability of a Fed rate cut as soon as this month after two Fed governors — Christopher Waller and Michelle Bowman — said they were open to the move, depending on data. Speaking this week, Powell reiterated that the Fed is waiting to see the effects of Trump's tariffs, but refused to rule out the possibility of a cut in July.
Expectations for Fed cuts this year have waxed and waned since December. But policymakers' median forecast — which didn't change in March and June — was that the band would decline to 3.75% to 4% by the end of the year, implying two quarter-point cuts.
Interest-rate swaps showed that traders are penciling in a total easing of 52 basis points this year — in line with the Fed's median forecast. Prior to the job report, traders had priced in almost 70 basis points of easing for the year.
The jobs report has arguably been the most influential piece of economic data for bond traders in recent months, often generating outsize moves. Two-year yields, which are the most sensitive to the Fed's policy, have moved an average 10 basis points on the day of the payroll releases over the past year, twice the size of movements on the days of consumer price index releases.
