Authored by Benjamin Picton, Rabobank senior strategist
US bond yields took a hit on Friday following the release of the August US payrolls report, which highlighted a weakening labor market. Yields on US 10-year bonds dropped by 8.5 basis points to 4.08%, with Australian and New Zealand 10-year sovereign yields also declining this morning by 5 and 4.5 basis points respectively.
Market expectations are now pricing in a Fed rate cut in September as almost certain, with the possibility of at least one more cut (possibly two) by the end of 2025, including a 10% chance of a 50 basis points rate cut. Despite this, US stocks closed lower on Friday, with the NASDAQ performing better than the Dow Jones which ended 0.48% lower.
Gold prices are on the rise again this morning after surging more than 4% last week to reach all-time highs. The anticipation of lower real rates is seen as a driving factor behind this increase, with the US front-end under pressure after the weak payrolls report and ahead of the upcoming CPI figures that could confirm a stagflation scenario.
The Ukraine war and the weaponization of the dollar was the straw that broke the camel’s back pic.twitter.com/QL6COvzeXK
— zerohedge (@zerohedge) September 7, 2025
5-year, 5-year inflation swaps in the US have been increasing since April, while 2-year treasury yields have been declining since mid-May. The politicization of the Fed is believed to be contributing to this unusual price action. Short-term nominal yields dropped significantly after Adriana Kugler’s announcement of stepping down as a Fed Governor on August 1st, and dropped again following Trump’s decision to fire Lisa Cook on August 21st. This led to an ‘alligator-jaw effect’ on the graph where long-term real yields remained relatively stable.
Last week, Trump escalated his efforts to exert control over monetary policy by criticizing Jerome Powell for not cutting rates sooner and nominating potential successors who have shown a willingness to cut rates. Events in other markets, such as Japan and France, also suggest a shift towards higher borrowing costs at the long end of the curve.
France’s PM Bayrou faces a confidence vote today and is likely to lose his position, potentially leading to a new Prime Minister who may not be as supportive of fiscal restraint. In the UK, Deputy PM Angela Rayner resigned last week, causing uncertainty in the gilts market and raising concerns about the country’s fiscal position.
As front-end yields decrease due to expectations of easier monetary policy, the situation at the long end of the curve remains complex. Balancing fiscal adjustments with economic growth and financing priorities presents a policy challenge, raising questions about the feasibility of finding a solution to the current economic predicament.
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