Bond Traders Scour Payrolls to Gauge Fed Path Amid Oil Rise

Bond investors, who have been focused on inflation since the Iran war began, say a surprise in the monthly US jobs report has the potential to upend their expectations for Federal Reserve interest-rate cuts.

Strategists at PGIM Fixed Income, Natixis and Amerivet Securities are on watch for February payrolls significantly above or below expectations. That could shift the focus back to the labor outlook even as rising oil prices tied to the Middle East conflict weigh on the market.

Treasuries sold off this week on concern that the recent action in energy markets could spill over and drive inflation higher. Two-year yields — the maturity most closely tied to expectations for Federal Reserve policy — jumped to their highest level of the year so far, and traders slashed bets on rate cuts in 2026.

“If jobs are being destroyed, the Fed may go back to taking some risks” and cut rates, said Robert Tipp, head of global bonds at PGIM.

A weak reading has the potential to help firm up bets on a second rate cut this year, sparking gains in the $31 trillion Treasury market. On the flip side, a stronger-than-expected report would likely further dampen the outlook for Fed easing, pushing yields higher.

“Global rates are reacting to energy around the Iranian situation. If we get a better number tomorrow it fuels the fire,” said Gregory Faranello, head of US rates at Amerivet Securities.

Investors have been ping-ponging between inflation fears tied to rising oil prices, resilience in economic growth and longer-term questions about whether artificial intelligence will ultimately boost productivity or begin eroding employment. With Treasury yields hovering in a range — benchmark 10-year notes rose to 4.17% this week — the jobs data, followed by next week’s consumer price index report, could help provide the market with clearer direction.

“The Fed is more focused on the inflation side of their mandate at the moment,” said Anders Persson, CIO and head of global fixed income at Nuveen. “As there’s so much anxiety about AI, the market will look for any sign of sectors being impacted in the jobs report.”