Treasury Market Blind Spot: The Payrolls Silenc
Bond traders are preparing for one of the most unusual payrolls Fridays in recent memory. At 8:30 a.m. Eastern Time, the Bureau of Labour Statistics should release the Employment Situation Summary, the data point that typically sends Treasury yields lurching in both directions. Instead, the government shutdown has closed the BLS, leaving Wall Street without the month’s most important number. The absence comes at a sensitive moment for Treasuries. The last release, for August, showed just 22,000 jobs created, the weakest since the pandemic recovery began. More damaging were the revisions: June, initially positive, was recast as a 13,000 job loss. For months we have argued payrolls were overstated, but those revisions confirmed the slowdown had begun far earlier than headline prints suggested.
September’s report would have been decisive. A second weak print would have cemented expectations of imminent Fed easing, perhaps even of an outsized cut. A rebound could have checked that momentum. Instead, the market is left with partial indicators. The ADP National Employment Report this week estimated a 32,000 fall in private payrolls—its first decline in years—and revised earlier months lower. The direction is clear: the labour market is weakening, but the speed remains unknowable.
Treasuries have already leaned towards safety. Two-year yields, highly sensitive to Fed expectations, slipped around 9 basis points this week, while 10-year yields are back below 4.1 per cent. Futures now price a full quarter-point cut at the Fed’s next meeting, with growing odds of a larger move. Liquidity has thinned ahead of the non-event, with wider bid-offer spreads and lower volumes as investors hesitate to commit without confirmation from the data. The Fed itself faces the same dilemma as the market: act without payrolls and risk cutting too little or too much.
The shutdown has also unsettled international confidence. For overseas buyers of Treasuries, the suspension of the most important US release raises questions about the reliability of America’s statistical system. These investors buy Treasuries not only for liquidity but for the credibility of the underlying data. When that credibility falters, the safe-haven premium takes a knock.
Normally the market would turn to second-tier indicators, but even those are compromised. The weekly jobless claims report, the best high-frequency barometer of layoffs, has also been suspended due to the funding lapse. That leaves little beyond corporate earnings guidance and regional ISM surveys—useful but narrow and noisy.
The result is a Treasury market that appears calm but only because of uncertainty. Yet this stability is deceptive. Even when the shutdown ends, the figures may not bring relief. The gap between payrolls and the household employment measure—showing 575,000 fewer jobs since April despite payrolls growth—suggests further downward revisions are highly likely. If our analysis is correct, the US economy is weaker than assumed and may already be in, or rapidly heading towards, a recession. That is a profoundly positive backdrop for fixed income, where today’s lower yields could mark the start of a much larger rally.
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