Odds of a September rate cut are soaring, while a drop in 10-year Treasury yields may offer some relief to mortgage borrowers
A string of underwhelming US economic indicators triggered a sharp drop in Treasury yields on Wednesday, reinforcing expectations that the Federal Reserve could begin cutting interest rates as early as September — a shift with broad implications for borrowing costs, including mortgage rates.
Investors piled into government bonds following disappointing private-sector employment figures and a surprise contraction in service-sector activity. Yields on notes from two to 10 years fell to their lowest levels in nearly a month, as bond traders recalibrated their expectations for monetary easing.
Fueling the rally was fresh data from ADP Research, showing private employers added the fewest jobs in over two years. That release came hours before the Institute for Supply Management (ISM) reported that its gauge of service activity dipped into contraction territory for the first time since June 2023. Together, the two reports pointed to a cooling economy — and raised the likelihood that the Fed may need to act sooner than previously thought.
“This is a leading indicator into what we think is going to happen in Friday payrolls,” said Jim Caron, a chief investment officer at Morgan Stanley Investment Management, speaking on Bloomberg Television. “It does make the Fed probably have to step up and look. The thing they are worried about the most is a softening in the jobs market.”
Markets reacted swiftly. Fed futures contracts began pricing in a near 95% chance of a rate cut by September, up from 82% just a day earlier. The odds of two quarter-point reductions — potentially in October and December — also increased. Bond yields dropped further as oil prices fell on news that Saudi Arabia may ramp up production, pulling longer-dated Treasury yields, including the 30-year, down by as much as 10 basis points to 4.35%.
While yields slid, mortgage markets took notice. Since mortgage rates typically move in tandem with 10-year Treasury yields, a sustained downturn in bond yields could offer relief to homebuyers and homeowners facing affordability constraints after years of elevated borrowing costs.
President Donald Trump responded to the ADP figures with another public call for monetary stimulus. In a social media post, he again urged the Fed to “LOWER THE RATE,” continuing his long-standing criticism of current policy. Although Fed chair Jerome Powell is unlikely to react directly, strategists suggested the political pressure may influence those who aspire to replace him.
The moves came against a backdrop of volatility in expectations. Just days prior, investors were largely unwinding bets on cuts due to stronger-than-expected economic prints and inflationary concerns, particularly those linked to Trump’s proposed tariff agenda. In fact, May marked the Treasury market’s first monthly loss of the year, down about 1%, according to a Bloomberg index.
Yet the bond market rally found support again with signs of labor market fragility. Still, not all indicators are aligned. While the ISM services index fell, its employment subcomponent surprisingly showed growth for the first time in three months. Moreover, the prices-paid index jumped to its highest level since November 2022 — a potential warning sign that inflationary pressures remain.
Other labor metrics have also painted a murky picture. Tuesday’s release of the Job Openings and Labor Turnover Survey (JOLTS) showed a surprising rise in vacancies in April, with hiring rebounding across several industries — a contrast to the more pessimistic ADP data.
Markets are now laser-focused on Friday’s nonfarm payrolls report, which is expected to show a cooling in hiring. Economists forecast that employers added 130,000 jobs in May, down from 177,000 in April, with the unemployment rate holding steady at 4.2%.
If current trends continue, a Fed rate cut could come at a pivotal moment for housing markets, which have been battered by high rates. Lower bond yields filtering into cheaper mortgage rates could stimulate homebuying demand — but only if economic weakness doesn’t deepen too quickly.
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