US Treasury yields fluctuate downward as weak employment and inflation risks fiercely tug against each other

(1) U.S. Treasury yields fell on Friday amid choppy trading, as the market struggled to weigh a weak employment report against persistent inflation concerns. Non-farm payrolls in February unexpectedly decreased by 92,000, far below expectations, boosting speculation that the Federal Reserve may need to accelerate rate cuts. However, soaring oil prices driven by Middle East conflicts continued to intensify inflation fears. (2) The benchmark 10-year Treasury yield fell 2.7 basis points to 4.119%, after previously reaching a three-week high of 4.187%. The two-year Treasury yield plunged 6.1 basis points to 3.538%. Despite the daily decline, yields surged sharply this week, with both the 10-year and two-year yields rising about 16 basis points, poised for the largest weekly gain since early April. (3) Thomas Urano, co-chief investment officer at Sage Advisory, highlighted the market's dilemma: "This is an unusual combination. On the surface, the macro environment seems relatively healthy, but the labor market is very weak, while inflationary pressures are rising. The U.S. Treasury market is currently confused, wavering between two major risks—whether to be more wary of inflation risks driven by crude oil, or to focus more on the weak labor market that could drag down economic growth." (4) Inflation expectation indicators continued to rise. The five-year U.S. Treasury inflation-protected securities breakeven yield rose to 2.608%, the highest level in nearly a year; the 10-year breakeven yield was 2.327%, indicating that the market expects an average annual inflation rate of about 2.3% over the next 10 years. (5) In terms of interest rate expectations, after the employment report was released, the probability of the Federal Reserve cutting rates by at least 25 basis points at the June meeting rose to 48.2%, up from about 30% earlier this week. The possibility of action at the March or April meetings has been basically ruled out. The dual pressure of weak employment and inflation risks presents Federal Reserve officials with a difficult policy choice.