Monthly Interest Rate Update
U.S. Treasury yields fell sharply after a weak July jobs report revealed sluggish labor market growth and major downward revisions to prior months. With unemployment rising and job creation slowing, markets now expect faster Fed rate cuts—despite rising inflation and mounting federal debt pressuring long-term yields.
Two-year U.S. Treasury yields dropped a quarter-point on August 1 immediately after the release of the July jobs report, while 10-year yields fell 14 basis points.
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Jobs only grew by 73,000, well below consensus estimates.
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Even more concerning, prior months were revised downward by 258,000, suggesting the labor market is not as healthy as originally thought.
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Taken together, the last three months represent the slowest pace of job growth since the pandemic.
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The unemployment rate ticked up from 4.1% to 4.25%.
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At 62.2%, the labor force participation rate was largely unchanged month over month, but it has fallen by 0.5 points in the past 12 months.
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The Federal government workforce, meanwhile, has fallen by 84,000 so far this year.
The unwelcome labor market data comes on the heels of the July 30 FOMC announcement that the Fed funds target would remain unchanged at 4.375% (midpoint of target range). However, two members of the rate-setting committee dissented, suggesting a quarter-point cut would be the best policy at this point. (Nine members voted in favor.)
This combination of news prompted markets to expect a faster pace of cuts in the coming months. Futures traders are now pricing at a 93% chance of a quarter-point cut at the next FOMC meeting on September 17, up from 47% just a week ago. Similarly, the probability of 75 bp in cuts by year-end has jumped from 12% to 49%.
The shift in expectations also reflects the impact of politics on the outlook for rates. President Trump has been pressuring Fed Chair Jay Powell to boost the economy by cutting rates. While the central bank is a non-partisan, independent body, Powell’s term expires in May of 2026. Several rumored candidates to replace him (including one of the dissenting FOMC voters) have been publicly “auditioning” for the job by signaling their willingness to pursue a more dovish monetary policy.
Further complicating the picture, inflation has been heating up again. If a weak labor market argues for rate cuts, higher inflation suggests the opposite. The consumer price index (CPI) rose from 2.4% to 2.7% last month, and the market’s inflation expectations ticked up as well, as reflected in TIPS bond yields.
Finally, the continued expansion of the Federal deficit is starting to put more pressure on the long end of the curve. The nonpartisan Congressional Budget Office (CBO) forecasts the Big Beautiful Bill will add $3.4 trillion to the Federal budget deficit in the next decade (excluding interest costs) and push government debt over the $41 trillion mark in the next few years. Despite the recent drop at the front and middle of the curve, the longer end has steepened. Ten-year Treasuries have stayed above 4.0% for the past 9 months, the spread between five and 10-year Treasuries has widened by 30 bp since December; and the 5-10 spread has widened by more than 60 bp.
Key Statistics: Interest Rates, Unemployment and Inflation
| Year-end 2021 | Year-end 2022 | Year-end 2023 | Year-end 2024 | July 31, 2025 | |
|---|---|---|---|---|---|
| 10-yr Treasury yield | 1.51% | 3.87% | 3.88% | 4.57% | 4.37% |
| 2-yr Treasury yield | 0.73% | 4.43% | 4.25% | 4.24% | 3.96% |
| Spread | 0.78% | -0.56% |
-0.37% | 0.33% | 0.41% |
| Fed Funds Target (mid) | 0.125% | 4.375% |
5.375% | 4.375% | 4.375% |
| CME Term SOFR 1-mo | 0.055% | 4.36% | 5.35% | 4.33% | 4.35% |
| CPI (y/y change) | 7.0% | 6.5% | 3.1% | 2.7% | 2.7% |
| Core PCE (monthly) | 4.1% | 4.7% | 3.16% | 2.81% | 2.79% |
| 5-yr TIPS (market breakeven) | 2.91% | 2.38% | 2.15% | 2.39% | 2.48% |
| U-3 Unemployment | 3.9% | 3.5% | 3.7% | 4.2% | 4.2% |
| Real avg weekly earnings | 4.7% | -3.1% | 0.5% | 1.0% | 0.8% |
| Annual change in NFP jobs | +6,451,000 | +4,503,000 | +2,560,000 | +1,450,000 |
+1,768,000 |
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May-July nonfarm payrolls have posted the weakest three-month period since the pandemic.
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This includes 258,000 in downward revisions for May and June, virtually erasing any gains for those months and changing the recent labor market picture materially.
U.S. Treasury Yields in Past Month
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Rates fell across the curve after the labor market report was released.
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The curve is very flat on the front end, with two- and five-year yields on top of each other.
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Beyond five years, the curve steepens significantly.
Wider Spreads on the Back End of the Yield Curve
Associated Bank offers a wide range of instruments for hedging interest rate, commodity and foreign currency risk, including foreign exchange in more than 75 currencies. Companies interested in learning more about these instruments should contact their Associated Bank Relationship Banker or the bank’s Capital Markets Department at 866-524-8836.
All rates shown are indications only and subject to change.
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