Bond Dealers Begin a Volatile Day as Crucial US Employment Data is Released

Bond Market Braces for Turbulence Ahead of Key US Events

Bloomberg

Bond investors are preparing for a potentially volatile Friday, as two major developments—a crucial US employment report and a possible Supreme Court decision regarding President Donald Trump’s tariffs—could shake up the Treasury market, which has recently been relatively calm.

The first event to watch is the release of December’s jobs data at 8:30 a.m. in Washington. This report is highly anticipated, as it’s expected to provide a clearer picture of the economy following weeks of data disruptions caused by the government shutdown. Depending on the outcome, the report could either reinforce expectations that the Federal Reserve will keep rates unchanged this month or increase speculation about a possible fourth consecutive rate cut.

Once the jobs data is out, attention will turn to the Supreme Court, which could issue a decision as early as late Friday morning on the legality of the president’s tariffs. If the court rules against the tariffs—which have brought in significant revenue and helped ease the federal deficit—Treasury prices could come under pressure.

“Markets have grown more complacent in recent months due to a lack of economic data,” said Zach Griffiths, who leads investment-grade and macro strategy at CreditSights. “We’re likely to see a return of volatility.”

He added that the tariff ruling is a major unknown. With the $30 trillion US government debt market stuck in a narrow trading range for weeks, Friday’s combination of events could deliver a significant jolt, especially with the 10-year Treasury yield hovering between 4.1% and 4.2%.

Federal Reserve in the Spotlight

Last year, Treasuries delivered over 6% returns—their strongest performance since 2020—thanks to a cooling job market that prompted the Fed to cut rates three times in a row by a quarter-point each.

Market participants expect the upcoming employment report to indicate a steady labor market, which could give the Fed reason to pause at its January 27-28 meeting. According to Bloomberg’s survey of economists, December payrolls are projected to increase by 70,000, following a 64,000 rise in November. The unemployment rate is expected to dip to 4.5% from 4.6%.

Currently, traders see only about a 10% chance of a rate cut this month, with the next reduction likely in June—after Fed Chair Jerome Powell’s term ends—and another possible cut later in the year.

Gregory Faranello, head of US rates trading and strategy at AmeriVet Securities, noted that if the payrolls report shows little to no job growth, the likelihood of a January rate cut could jump to 50%.

Yield Curve Implications

If the jobs data is particularly weak, yields across maturities are expected to fall, with shorter-term bonds likely outperforming and causing the yield curve to steepen.

Tariff Ruling: Market Impact

Regarding the potential Supreme Court decision, traders recall the market’s reaction on November 5, when justices appeared skeptical about Trump’s authority to impose tariffs under a 1977 law granting emergency powers to the president. On that day, longer-term Treasuries were hit hardest, as investors speculated that a ruling against the tariffs would widen the deficit and necessitate more government borrowing. However, the administration is expected to seek alternative legal strategies to reinstate most of the tariffs, which could limit any immediate market fallout.

On the prediction platform Kalshi, participants estimate about a 28% chance that the court will uphold Trump’s tariffs, and only a 40% probability that the government would be ordered to return tariff revenues right away.

JPMorgan Chase & Co. strategists, including Jay Barry, wrote this week that removing tariffs could reignite concerns about government finances, potentially pushing up long-term yields and steepening the curve. Still, they believe any impact should be modest, given the administration’s ability to pursue other legal avenues to restore most tariffs.

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