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Signs of US labor market weakening push yields lower

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Government shutdown affecting economic outlook, data

availability

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Supreme Court decision on tariffs may influence Treasury

market

By Davide Barbuscia

NEW YORK, Nov 6 (Reuters) - U.S. Treasury yields dropped

on Thursday on concerns over a weakening U.S. labor market, as

well as the prospect of more economic uncertainty caused by the

government shutdown in Washington and questions over the

legality of President Donald Trump's tariffs.

The U.S. government shutdown, the longest on record, has

forced investors to rely on private data in place of the Bureau

of Labor Statistics' monthly jobs report, which was due on

Friday November 7 but has been frozen by the shutdown. On

Thursday, a batch of private labor indicators pointed to a

weakening economy, driving Treasury yields lower and boosting

expectations for Federal Reserve interest-rate cuts.

U.S. employers announced 153,074 job cuts in October, global

outplacement firm Challenger, Gray & Christmas said on Thursday.

The job cuts represented a 183% surge and were the highest

October total in 22 years, as companies slashed costs and

embraced artificial intelligence, signaling a potential shift

toward more layoffs.

The Revelio Public Labor Statistics, a privately compiled

indicator of the labor market, showed the U.S. economy lost

9,000 jobs in October, predominantly driven by losses in the

government sector. The Chicago Fed estimated the U.S. jobless

rate likely inched up to 4.4% in October, a four-year high, as

hiring slowed and layoffs rose.

"Given the fact that the jobs market has been in a little

bit of a lull here, dating back to May, if this is an indication

of the near-term direction, it's a warning for the markets,"

said Jim Baird, chief investment officer with Plante Moran

Financial Advisors, referring to the Challenger jobs data.

The shutdown, now in its 37th day, added uncertainty to the

economic outlook, said Baird, as the longer it lasts, the

greater its likely impact on the economy. "Does the sentiment

shift in a more negative direction? Do consumers retrench

further, particularly if they're concerned about the overall

labor market situation? ... It has to be factored in the longer

the shutdown lasts."

Rates futures traders on Thursday assigned a 70% probability

that the Fed will cut rates by 25 basis points at its December

9-10 policy meeting, up from 62% on Wednesday, CME Group data

showed.

Benchmark 10-year yields and two-year yields

both dropped by about seven basis points to 4.089%

and 3.562%, respectively. Further out the yield curve, 30-year

yields declined by nearly five bps to 4.686%.

The MOVE index, a measure of expected volatility

in U.S. Treasuries, has risen in recent days but remains close

to the four-year low hit at the end of October.

Despite market concerns over a weakening labor market,

Chicago Fed President Austan Goolsbee said the lack of official

data on inflation during the government shutdown accentuated his

caution about cutting rates further. Cleveland Fed President

Beth Hammack was similarly cautious about future rate cuts, she

said on Thursday, due to ongoing high levels of inflation.

Inflation expectations for the next five years, as

measured by the breakeven inflation rate of five-year Treasury

Inflation Protected Securities, have been ticking

modestly higher in recent weeks, from 2.315% on October 20 to

about 2.4% this week.

SUPREME COURT CONSIDERS TARIFFS CASE

Investors are also assessing the potential impact of a U.S.

Supreme Court decision against tariffs, one day after the court

heard arguments over Trump's unprecedented use of a law meant

for national emergencies to impose taxes on imported goods.

"The IEEPA (International Emergency Economic Powers Act)

court case kicked off yesterday, and markets quickly priced in a

high probability that tariffs will need to be reversed," said

John Madziyire, head of US Treasuries and TIPS at Vanguard.

On the prediction market Kalshi, odds that the Supreme

Court would uphold Trump's tariffs fell to 24% on Thursday from

over 30% late on Wednesday.

U.S. Trade Representative Jamieson Greer said on

Thursday that some plaintiffs

could get a refund

in certain situations if the U.S. Supreme Court rules

against the tariffs, but the Treasury would have to figure out

any payment schedules.

Trump said he would consider a

'game two' plan

if the Supreme Court rules against the legality of

tariffs.

Lower revenue from tariffs could lead to wider government

budget deficits and more Treasury debt supply hitting the

markets, which would be negative for bonds. At the same time,

the prospect that tariffs may be permanently revoked could be

positive for Treasuries as it would remove a cause of inflation.

"Early indications from the U.S. Supreme Court indicate

skepticism over the legal standing of Trump's tariffs and the

obvious question is whether this is bond-bearish or bullish.

Yes, both," BMO Capital Markets analysts said in a note.