Bond investors focused on inflation since the Iran conflict erupted say an unexpectedly strong or weak US monthly jobs report could upend market expectations for Federal Reserve interest rate cuts.

Strategists from PGIM Fixed Income, Natixis, and Amerivet Securities are closely watching February's nonfarm payroll data to see if it significantly exceeds or falls short of forecasts. Despite Middle East tensions driving oil prices higher and pressuring markets, this data could refocus attention on the labor market outlook.

US Treasuries faced selling pressure this week as investors worried that recent energy market shocks could spread and push inflation upward. The yield on the 2-year Treasury note, which is most sensitive to Fed policy expectations, jumped to its highest level in over a month, with traders sharply reducing bets on rate cuts this year.

"If there is significant job loss, the Fed might reassume some risk" and lower rates, said Robert Tipp, Global Head of Bonds at PGIM.

Softer data could help solidify market expectations for a second rate cut this year, boosting the $31 trillion US Treasury market. Conversely, a stronger-than-expected report could further weaken expectations for Fed easing, pushing yields higher.

"Global rates are reacting to energy markets related to the Iran situation. If this week's data shows improvement, it will add to market volatility," said Gregory Faranello, Head of US Rates at Amerivet Securities.

Investors have been balancing inflation concerns from rising oil prices, resilient economic growth, and longer-term questions about whether artificial intelligence will ultimately boost productivity or begin to erode employment. US Treasury yields have been range-bound, with the benchmark 10-year yield rising to 4.14% this week. The jobs data and next week's consumer price index report may offer clearer market guidance.

Ahead of the report, options traders tied to the Secured Overnight Financing Rate have shifted toward strategies that profit if the Fed cuts rates even just once this year. Previously, trading activity focused more heavily on bets for deeper, longer-lasting easing.

Economists expect Friday morning's employment report, released in New York, to show 55,000 jobs added in February, down from 130,000 in the previous month. The unemployment rate, which edged down to 4.3% in January, is forecast to remain stable.