When we released last month’s article titled - The Clock is Ticking for the Fed, we highlighted our concerns about the strikingly large downward revisions in prior months’ non-farm payroll reports. While markets were distracted by political noise surrounding weak jobs data, we maintained that the U.S. economy was faltering—and that hard data, as usual, was slow to reveal the sobering reality.
The most recent non-farm payroll numbers have reinforced our view. August non-farm payroll numbers rose by just 22,000, well below the consensus forecast of 75,000, and significantly weaker than July’s revised print of 79,000. Adding to that, the two-month payroll net revision June-July unsurprisingly saw further downward revisions of -21,000, reinforcing our view that labor market softness, is more entrenched than headline numbers suggest.
Bond Market Reaction
Despite growing signs of economic weakness, markets were slow to reflect the underlying data. Between the release dates of the past two payroll reports(dated 1 August and 5 September respectively), long-end U.S. Treasury yields remained elevated, even as rate cut expectations were priced in. Yields on 20- and 30-year Treasuries edged higher, reflecting persistent term premium and cautious investor sentiment, until the release of the August payroll report came in significantly weaker than expected.
Source: Bloomberg. 5th September 2025
Given the longer duration exposure of the long end of the curve—where 30-year Treasuries typically carry durations of around 18 to 20 years—price sensitivity to interest rate changes is significantly amplified. Investors overweight in long-duration assets would have seen outsized capital gains as yields declined, making them the biggest beneficiaries of Friday’s rally in long-dated Treasuries.
Consumer Fragility
On the inflation front, we have yet to see a convincing spike from tariff-related pressures. More importantly, U.S. consumers are increasingly ill-equipped to absorb further price increases, especially after enduring the post-Covid inflation surge. We continue to expect the trade war would harm global growth more than inflation.
Source: Bloomberg. August 2025
Markets, from time to time, do get impacted by headline news or political narratives, but it is certainly worth remembering that fundamentals are equally, if not more important. With labor market softness deepening and consumer resilience waning, we believe the rally in Treasuries has room to run.
Source: First Sentier Investors, as of September 2025
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