Duration & Credit Pulse
Executive Summary
Bottom Line: The shocking August jobs report September 2025 delivered just 22,000 payrolls versus 75,000 expected, triggering the most dramatic Treasury rally since the banking crisis as the 10-year yield plunged 15.4 basis points to 4.08%, its lowest level since April. Yet credit markets exhibited remarkable disconnect, launching a record $90+ billion in new issuance while spreads remained pinned near historic tights—high yield at just the 10th percentile and investment grade at the 20th percentile—creating a dangerous divergence between deteriorating fundamentals and frothy technicals heading into the Fed's September 17 decision.
Duration Dashboard – Jobs Report September 2025 Impact
| Maturity | Sept 1, 2025 | Sept 7, 2025 | Weekly Δ | 5-Year Percentile |
|---|---|---|---|---|
| 2‑Year | 3.62% | 3.51% | -10.8 bp | 40th %ile (middle range) |
| 5‑Year | 3.70% | 3.58% | -11.4 bp | 45th %ile (middle range) |
| 10‑Year | 4.23% | 4.08% | -15.4 bp | 64th %ile (middle range) |
| 30‑Year | 4.93% | 4.76% | -16.8 bp | 87th %ile (elevated) |
Employment Shock Triggers Duration Rally
Curve Analysis: The Treasury curve underwent a dramatic parallel shift lower following Friday's employment catastrophe, with yields falling 10.8-16.8 basis points across maturities in the sharpest weekly rally since April's banking stress. The relatively uniform decline preserved the 2s30s spread near 125 basis points, suggesting markets view the jobs weakness as a broad economic slowdown rather than a near-term recession signal. Despite the week's plunge, the 30-year yield remains at the 87th percentile of its 5-year range, indicating substantial room for further declines if employment deterioration accelerates.
Friday's jobs report September 2025 release at 8:30 AM ET immediately transformed Treasury market dynamics as algorithms and traders alike struggled to process the magnitude of the miss. The headline figure of 22,000 jobs represented not just a disappointment but a fundamental break in the post-pandemic recovery narrative, made worse by June's stunning revision from positive 14,000 to negative 13,000—the first monthly job losses since December 2020. The 10-year yield's 15.4 basis point weekly decline masked even more dramatic intraday volatility, with the benchmark touching 4.02% in the immediate aftermath before settling at 4.08%. Earlier in the week, yields had actually spiked Monday when a federal appeals court ruled most Trump-era tariffs illegal, potentially requiring substantial refunds that would necessitate increased Treasury issuance.
Credit Pulse
| Metric | Sept 1, 2025 | Sept 7, 2025 | Weekly Δ | 5-Year Percentile |
|---|---|---|---|---|
| IG OAS | 74 bp | 74 bp | 0 bp | 20th %ile (low) |
| HY OAS | 252 bp | 259 bp | +7 bp | 10th %ile (extremely low) |
| VIX Index | 16.12 | 15.18 | -0.94 | 22nd %ile (low) |
The credit market's response to the employment shock revealed extraordinary technical strength overwhelming deteriorating fundamentals. Tuesday's $43.3 billion single-day issuance—the third-largest in history—met with order books reportedly 3-4x oversubscribed despite minimal new issue concessions. Investment grade spreads remained frozen at 74 basis points, just the 20th percentile historically, while high yield's modest 7 basis point widening to 259 still leaves spreads at the 10th percentile. This compression occurred even as the gap between BBB- and BB+ rated bonds narrowed to just 80 basis points, effectively erasing the investment grade/junk distinction.
• Major tech issuers launched multi-billion multi-tranche offerings
• Large banks tapped market with senior notes at tight spreads
• Even second-tier credits found eager buyers
Order Books: Routinely 3-4x oversubscribed
US Macroeconomic Assessment – Labor Market Breaks
The week of September 1-7, 2025 will be remembered as the moment the post-pandemic recovery narrative definitively ended. Friday's jobs report didn't merely disappoint—it shattered the carefully maintained fiction that the U.S. labor market remained resilient despite mounting headwinds. The 22,000 payroll addition against 75,000 expected would have been shocking enough, but the revision of June's data from positive 14,000 to negative 13,000 revealed that employment weakness had been masked by faulty seasonal adjustments and methodology changes for months.
Employment details reveal broad-based deterioration: The sectoral breakdown painted an even grimmer picture than the headline. Manufacturing shed 12,000 jobs, extending its contraction streak. Federal government employment declined by 15,000 positions, potentially reflecting early impacts of efficiency initiatives. Wholesale trade lost 12,000 jobs while retail added a mere 2,000 despite back-to-school season. Only healthcare (+31,000) and social assistance (+16,000) showed meaningful gains, both government-adjacent sectors that typically lag private sector turns. Average hourly earnings growth of 3.7% year-over-year came in below expectations, while the average workweek contracted to 34.2 hours, suggesting employers are cutting hours before cutting heads.
Manufacturing signals outright recession: Tuesday's ISM Manufacturing PMI release showing 48.7 for August marked the sixth consecutive month below 50, matching the longest contraction streak since the 2008-09 financial crisis. While new orders finally popped above 50 to 51.4, the employment component plunged to 43.8, consistent with significant job losses. Manufacturers cited uncertainty over trade policy, elevated input costs, and weakening global demand. The prices paid index remained sticky at 58.5, highlighting the stagflationary dynamics plaguing the sector. Services proved more resilient at 52.0, but with employment at 46.5, even the service sector is shedding workers.
Trade and currency dynamics amplify domestic weakness: The dollar's continued slide to 97.55 on the DXY index—down 11% year-to-date in its worst first-half performance in five decades—reflects growing international skepticism about U.S. policy coherence. Canada's September 1 withdrawal of retaliatory tariffs on $30 billion of consumer goods provided modest relief, though duties on steel, aluminum, and autos remain. The federal court ruling deeming Trump-era tariffs illegal, potentially requiring billions in refunds, adds a fiscal dimension to trade uncertainty. Meanwhile, OPEC+'s decision to boost production by 547,000 barrels daily helped cap oil at $67 despite Middle East tensions, providing the Fed some inflation relief. Yet this dollar weakness masks a darker reality: foreign central banks increasingly question the sustainability of U.S. fiscal deficits approaching 7% of GDP combined with monetary easing into still-elevated inflation—historically a recipe for currency crisis.
Fed caught between inflation persistence and growth collapse: St. Louis Fed President Musalem's September 3 speech now appears tragically behind the curve, warning against "unwarranted easing" just two days before data revealed the labor market had already broken. His acknowledgment that breakeven employment had fallen to 30,000-80,000 monthly means even August's positive print barely maintains equilibrium, while June's negative revision suggests we've been below breakeven for months. Market pricing shifted dramatically post-payrolls, with Fed funds futures now assigning 100% probability to a September 17 cut and growing speculation about 50 basis points rather than 25. The upcoming CPI report on September 11 takes on enormous importance—any upside surprise could trap the Fed between persistent inflation and collapsing employment.
Federal Reserve Policy Outlook – September 2025 Meeting Looms Large
The Federal Reserve faces its most consequential decision since the 2023 hiking cycle peaked as the September 17 FOMC meeting approaches with markets now certain of the first rate cut but divided on magnitude. Friday's employment disaster essentially forced the Fed's hand, with the CME FedWatch tool showing 100% probability of easing and a non-trivial 15% chance of a 50 basis point move. The June employment revision to negative territory fundamentally alters the policy backdrop—the Fed isn't preventing a slowdown but responding to one already underway.
The challenge for Chair Powell will be explaining why the Fed remained on hold through clear evidence of labor market deterioration without triggering panic about policy error. Markets have already delivered their verdict: the 2-year yield's plunge to 3.51% prices in 150+ basis points of cuts over the next year, suggesting traders expect an aggressive easing cycle once begun. The updated Summary of Economic Projections will prove crucial, particularly whether the median dot plot shows multiple 2025 cuts or maintains the gradual approach officials previously signaled. Any hint of internal dissent about the pace of easing could roil markets expecting decisive action.
Week Ahead: CPI Sets Stage for FOMC Decision
- Consumer Price Index (September 11): August CPI becomes the make-or-break data point before Fed blackout. Core expected at 0.2% monthly, but any upside surprise could limit the Fed to 25 basis points despite employment collapse. This is THE event that determines whether we get 25 or 50bp on September 17.
- Retail Sales (September 13): August retail sales expected -0.2% as employment weakness hits consumption. A deeper decline would cement 50 basis point cut expectations, while any positive surprise complicates the Fed's narrative.
- FOMC Meeting (September 17): First rate cut since 2019 now certain, only magnitude in question. Updated dot plot and Powell's press conference will signal whether this is a "mid-cycle adjustment" or the beginning of an aggressive easing campaign.
Credit Market Dynamics – Record Issuance Meets Reality Check
The extraordinary $90+ billion global issuance week exposed credit markets' desperate reach for yield ahead of anticipated Fed easing, with investment grade borrowers launching deals at spreads that would have been considered high yield levels just years ago. Tuesday's frenzy saw 27 companies access markets in a single day—just two deals shy of the all-time record. Major technology companies launched multi-billion dollar multi-tranche offerings, while large banks tapped markets with senior notes at remarkably tight spreads. Even second-tier credits found eager buyers: regional banks, REITs, and BBB- industrials all priced inside initial guidance with order books routinely running 3-4x oversubscribed.
Yet beneath the technical strength, fundamental cracks widened. The manufacturing sector's sixth consecutive contraction month, federal workforce reductions accelerating, and June's negative employment revision paint a drastically different picture than 74 basis point investment grade spreads suggest. High yield's compression to 259 basis points—the 10th percentile historically—prices in perfection precisely as perfection evaporates. The cognitive dissonance reached peak absurdity with the gap between the highest-rated junk bonds and lowest-rated investment grade notes narrowing to approximately 80 basis points, effectively erasing the risk distinction between investment grade and speculative credit. This extreme compression historically precedes violent repricing once the first crack appears—and June's negative jobs revision may have been that crack.
Key Articles of the Week
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Payrolls Rose 22,000 in August, Less Than Expected in Sign of Hiring SlowdownCNBCSeptember 5, 2025Read Article
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10-Year Treasury Yield Slides to Lowest Level Since April After Jobs ReportCNBCSeptember 5, 2025Read Article
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Credit Markets Near Records After $90 Billion Bond Sale SpreeBloombergSeptember 3, 2025Read Article
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Fed's Musalem Signals Policy in Good Place, Warns of RisksFederal Reserve Bank of St. LouisSeptember 3, 2025Read Article
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Treasury Yields Jump on Prospect of U.S. Having to Refund Tariff MoneyCNBCSeptember 2, 2025Read Article
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ADP National Employment Report: Private Sector Added 54,000 JobsADPSeptember 4, 2025Read Article
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ISM Manufacturing PMI at 48.7%; Sixth Month of ContractionInstitute for Supply ManagementSeptember 2, 2025Read Article
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Employment Situation Summary - August 2025U.S. Bureau of Labor StatisticsSeptember 5, 2025Read Article
Frequently Asked Questions – Jobs Report September 2025
What was the actual jobs number for August 2025 and why did it shock markets?
The U.S. economy added just 22,000 jobs in August 2025, massively missing the 75,000 consensus estimate. More shocking was the revision showing June 2025 actually lost 13,000 jobs—the first negative print since December 2020—revealing employment weakness had been building undetected for months.
How did Treasury yields react to the weak employment data?
The 10-year Treasury yield plummeted 15 basis points over the week to 4.08%, hitting four-month lows after the jobs report. The 2-year yield fell 11 basis points to 3.51% as markets priced in certain Fed rate cuts, with the entire yield curve shifting lower in the sharpest rally since April's banking stress.
Why are credit spreads still so tight despite weakening employment?
Investment grade spreads remained at just 74 basis points (20th percentile) while high yield sits at 259 basis points (10th percentile) due to massive technical demand. The week saw record $90+ billion in new issuance with order books 3-4x oversubscribed as investors desperately reach for yield ahead of expected Fed easing.
What does this mean for the Federal Reserve's September 17 meeting?
Markets now price 100% probability of a rate cut on September 17, with growing speculation about 50 basis points versus 25. The June jobs revision to negative territory fundamentally changed the narrative—the Fed isn't preventing a slowdown but responding to one already underway, making aggressive action more likely.
