The benchmark 10-year Treasury yield jumped 11 basis points to 4.61% , while the 2-year yield — often viewed as a proxy for Fed policy expectations — rose to 4.92% , its highest level since mid-April. The rise in yields followed a robust May jobs report that surprised economists and rattled investors betting on a summer rate cut.
Labor Market Surpasses Forecasts
The U.S. economy added 288,000 nonfarm payroll jobs in May, handily beating the consensus estimate of 185,000. Unemployment dipped slightly to 3.8% , while average hourly earnings rose 0.4% on the month and 4.2% year-over-year — signs that wage inflation remains sticky.
“This was a blowout report,” said Dana Hollister, chief U.S. economist at Keystone Asset Management. “Job growth remains surprisingly strong, and the Fed will take this as validation that the economy is far from needing stimulus.”
The report reinforced the narrative that the labor market remains tight, despite 11 rate hikes over the past two years aimed at taming inflation. Consumer spending has also remained resilient, powered in part by wage gains and easing energy prices.
Fed Policy Outlook Shifts Again
Traders quickly repriced expectations for monetary policy following the data. According to CME’s FedWatch Tool, markets now see only a 35% chance of a rate cut by September, down sharply from 70% earlier in the week. For months, investors had anticipated that the Fed might begin easing rates as inflation drifted closer to the 2% target. However, the continued strength in employment and wages complicates that outlook.
“It’s a classic case of good news being bad news for markets,” said James O’Reilly, fixed-income strategist at Tilden Global Advisors. “The stronger the data, the more the Fed will feel it has the runway to hold rates steady — or even raise them again if inflation reaccelerates.”
Fed Chair Jerome Powell has repeatedly said decisions will be data-dependent, and that the central bank is prepared to hold interest rates steady “as long as needed” to bring inflation under control.
Markets React as Rate-Sensitive Sectors Slide
Friday’s bond sell-off weighed on equity markets, with the S&P 500 slipping 0.9% , led lower by losses in real estate and technology stocks — sectors particularly sensitive to interest rateexpectations. The Nasdaq Composite fell 1.3% , while the Dow Jones Industrial Average edged down 0.7% . Higher yields typically put downward pressure on stock valuations, especially for growth-oriented companies, whose future earnings become less attractive when discounted at higher rates. Meanwhile, the U.S. dollar strengthened against a basket of major currencies, and gold prices pulled back slightly, dropping 0.8% to $3,005 per ounce , as investors rotated into yield-generating assets.
Investor Caution Ahead of Fed Meeting
The bond market will likely remain volatile in the lead-up to the Federal Open Market Committee (FOMC) meeting on June 12 , where the Fed is expected to hold rates steady but provide updated forecasts. All eyes will be on the “dot plot,” which maps policymakers’ projections for interest rates through 2026.
“If the Fed signals fewer cuts than the market expects, we could see another leg higher in yields,” said Alexis Zhang, managing director at Crescent Fixed Income. “Bond investors are watching every data point now — employment, CPI, PCE — to gauge what the Fed does next.”
The Bottom Line for Investors
For bond investors, the recent yield spike represents both a risk and an opportunity. Rising yields can erode existing bond prices but offer better entry points for new buyers. For equity investors, the outlook is more complex, especially if the Fed’s tightening bias endures longer than anticipated.
“With yields approaching 5% on the short end, you’re getting paid to wait,” said Hollister. “But equity markets will need strong earnings growth to keep climbing in this kind of rate environment.”
In the near term, expect more choppy trading across asset classes as markets recalibrate to a stronger economic backdrop that could delay the return of accommodative monetary policy.
