By Patti Domm

After months of worrying about high deficits and inflation, the bond market has shifted focus. Troubling weakness in the labor market is starting to drive down longer-term interest rates.

Long-end yields could keep falling as the market worries whether the Federal Reserve will cut interest rates fast enough to help the economy.

The benchmark 10-year Treasury yield has fallen all summer as the labor market shows signs of deterioration. If that continues, the 10-year could move below 4% for the first time since April. The yield touched 4.8% in January when the market was more concerned with debt and deficits and inflation.

The Fed is widely expected to cut its fed funds target rate range by a quarter point Wednesday. The CME FedWatch tool, a measure of traders' bets on interest rates, shows a 95% probability to a quarter-point cut.

But some influential voices are starting to question that assumption. The Fed could cut deeper if it concludes that it is behind the curve in aiding the economy. Its target rate, at 4.25% to 4.5% currently, more directly impacts short-term yields, such as the 2-year note.

"I think there is a 50/50 chance" that the Federal Open Market Committee cuts by a half percentage point, said Rick Rieder, BlackRock CIO of global fixed income.

"Everything we've seen from labor...suggests there is risk of falling behind what is clearly a moderating, severely slowing labor dynamic," Rieder said. Weekly unemployment claims hit a four-year high Thursday.

The Bureau of Labor Statistics said on Tuesday that its regularly scheduled review of jobs data found that the U.S. added 911,000 fewer jobs in the 12 months ending in March than previously thought.

Fed officials may acknowledge that, Rieder said. Some may say that had they known the full extend of labor-market weakness at their most recent meeting in July, they would have voted then to cut rates rather than hold them steady.

Revisions in the monthly jobs data showed tepid job growth and an actual decline in jobs of 13,000 in June, the first negative number since December 2020.

Longer-duration bonds have become attractive investments in the past few weeks, Rieder said. That includes municipal bonds and investment grade credit with maturities of 10 to 30 years. When yields fall, bond prices rise.

He has lowered his expectations for the 10-year Treasury yield range, and now sees it trading in the 3-3/4% to 4-1/4% range. He had previously targeted a range of 3-3/4% to 4-5/8%. The 10-year yield was at 4.05% Friday.

"I think longer-end interest rates deserve a seat at the table, but not the head of the table," he said. He had been focused on the front end and middle of the yield curve.

The decline in the 10-year Treasury yield is helpful to the economy since it influences business and consumer loans, including home mortgages.

Bond traders focus on the so-called yield curve, or the difference between short-term rates and long-term rates. The curve normally bends upward, since investors demand a larger reward in the form of yield for holding longer term debt.

But the yield curve has been flattening lately, says John Briggs, head of U.S. rates strategy at Natixis Corporate and Investment Banking.

On Sept. 1, the two-year to 10-year spread was about 61 basis points. On Friday, it was about 50 basis points. A basis point equals 0.01 of a percentage point.

That could simply reflect traders changing how they are positioned in the market. But Briggs thinks something more may be at work.

"I'm wondering if the flattening is starting to show more of a recession trade that you tend to get earlier before you get into rate cut cycles. The curve flattens because the market fears the Fed isn't being aggressive enough in cuts to keep up with lower growth expectations," Briggs said.

Worries about the yawning deficit are still alive, too, Briggs said. "I think it is just tabled. Long run, those deficit worries aren't going to go away and are going to reassert themselves," he said. "But the market is more worried about the growth outlook now."

The Fed will worry, too, since it is obliged by statute to work toward full employment as well as keeping prices stable.

"Much of the country that is interest-rate-sensitive is having a very hard time," Rieder said. Keeping the economy full employment will occupy the Fed in the coming years, Rieder said.

Rieder has been reported to be a potential candidate to replace Fed Chair Jerome Powell. He declined to comment about that issue.

The Fed cut rates three times last year but paused after a quarter point cut last December, amid concerns that President Donald Trump's tariff policy could spark inflation. So far, the inflation impact has been modest.

Rieder said the current inflation rate just below 3% isn't "scary, infectious inflation."

If the labor market is signaling a weaker economy, that could be by far a bigger concern, even if temporarily lower yields might be positive for the stock market.

The Fed is coming late to cuts, says George Goncalves, MUFG head of U.S. macro strategy.

"They could have missed their window, and now they have to do more and at a quicker pace," he said. He expects a quarter-point cut next week. He said the market currently expects 1.5 points in cuts by the end of next year or early 2027, but those cuts should come sooner.

Some investors have written off the large downward revisions to jobs numbers as backward-looking and therefore unimportant. But they are in denial, Goncalves says.

"The 10-year is telling a different story," he said.

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September 12, 2025 15:22 ET (19:22 GMT)

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