Weak US Employment? Some traders are betting on a strong non-farm payroll tomorrow, with the 10-year US Treasury yield potentially rising above 4%

On Wednesday, the "favorite employment indicator of the Federal Reserve" collapsed, with JOLTS job vacancies unexpectedly weakening to the lowest level since early 2021. The evidence of a weak labor market has strengthened market expectations of a significant rate cut by the Federal Reserve, leading to a sharp drop in US bond yields. The yield on the 10-year benchmark bond, known as the "anchor of asset pricing," plunged by 7.5 basis points to 3.768%.

However, there are traders currently betting that tomorrow's non-farm payroll report will be very strong, potentially pushing US bond yields up by 25 basis points, breaking through the key level of 4%.

Analysis points out that in order to showcase a "strong economy" before the election, the US Department of Labor may "adjust data" to create the illusion of a strong labor market. On Wednesday, demand for put options on 10-year Treasury bonds significantly increased, with some investors betting that US bond yields will rise to 4.05% by Friday.

Increase in put options, traders betting on a surge in US bond yields

On September 5th, the well-known financial blog ZeroHedge published an article stating that despite the poor performance of the JOLTS employment report, the market seemed to have misjudged its importance, mistakenly equating a lagging employment report with the upcoming latest data. The JOLTS report typically lags behind the non-farm payroll data by a month, and with recent frequent data revisions, the US Bureau of Labor Statistics may once again create a "stronger labor market" image through data adjustments. In any case, the Federal Reserve may cut rates by 25 basis points in September to meet the political demand of showcasing a "strong economy" in the two months before the election.

Last week, ZeroHedge made a prediction on social media:

Anyone expecting a weak (non-farm) payroll report next week will be very disappointed: that's why there was a downward revision before. Now, the Bureau of Labor Statistics (BLS) will continue to manipulate data or target adjustments to make the economy look "as strong as possible" in the two months before the election.

It stated that once the employment data released on Friday is "hot," the market will immediately reverse the "economic hard landing" expectations of the past few days and cause US bond yields to soar rapidly. ZeroHedge added that the August non-farm payroll may reach 200,000, higher than the market's general expectation of 165,000, and higher than July's 114,000. The expectation of an economic hard landing has raised the possibility of a 50 basis point rate cut in September to 50%.

There seems to be a consensus in the market about this. Bloomberg's short-term interest rate expert Edward Bolingbroke pointed out that demand for put options on 10-year Treasury bonds significantly increased in early trading on Wednesday, with some investors betting that US bond yields will rise to 4.05% by Friday. Some traders have invested millions of dollars, betting that US bond yields will surge in the next 48 hours. The main risk event in the options market this time is Friday's non-farm payroll report. In other words, some are betting that the report will be strong, pushing the 10-year US Treasury yield up by a significant 25 basis points.

Although most investment banks still hold a "dovish" stance, some selling institutions expect massive long liquidation after the release of the employment report. Citigroup strategists previously recommended short positions in 10-year US Treasuries, believing that if employment data meets expectations, interest rates will rise because the "labor market has not deteriorated significantly."

ZeroHedge stated that whether for political needs to address the election or as a result of capital flows, at least one trader has wagered millions of dollars on the non-farm payroll data driving US Treasury yields higher.

Currently, the 10-year US Treasury yield remains at a two-week low

Data released on Wednesday showed that there were 7.673 million job vacancies in the US in July, dropping to the lowest level since the beginning of 2021, significantly below the expected 8.1 million, with the previous value revised down from 8.184 million to 7.91 million. Citigroup stated that if Friday's non-farm payroll report confirms a deteriorating labor market, the Federal Reserve is expected to cut interest rates by 50 basis points in September and another 50 basis points in November.

After the release of US JOLTS data, the 10-year benchmark bond yield fell by as much as 7.5 basis points to 3.768% to its lowest level since August 21. Currently, the US 10-year Treasury yield remains at a two-week low level, at 3.769%.