U.S. May nonfarm payrolls far exceeded expectations, adding 172,000 jobs versus the 85,000 consensus estimate. Combined with escalating Middle East tensions after Iran launched multiple missiles at Israel, global bond markets came under heavy pressure. Japan's 10-year government bond yield followed U.S. Treasury yields higher on Monday (June 8), briefly touching 2.715% — a more-than-one-week high.
Nonfarm Surge Triggers Aggressive Fed Hike Pricing
The Bureau of Labor Statistics reported Friday that nonfarm employment jumped 172,000 in May, dwarfing economists' forecast of 85,000. The unemployment rate held at 4.3%. This was the first jobs report under new Fed Chair Kevin Warsh, and markets interpreted the data as evidence that the labor market remains too hot, warranting further policy tightening. The policy-sensitive 2-year Treasury yield soared to 4.160%, a one-year high. Goldman Sachs chief U.S. economist David Mericle withdrew his earlier forecast for a Fed rate cut this year, saying labor resilience has removed any room for easing.
Oil Prices Jump on Middle East Conflict, Complicating Inflation Outlook
Geopolitical risks added another layer to the inflation picture. Iran's missile strikes against Israel, in retaliation for Israeli operations in Lebanon, pushed crude oil prices higher and stoked supply chain concerns. Safe-haven demand and rising energy cost expectations together strengthened bets on a Fed rate hike this year. According to Seeking Alpha, interest-rate futures now assign a very high probability to a rate increase before year-end, completely reversing the widespread cut expectations seen earlier in 2026.
Japanese Yields Follow U.S. Higher; BOJ May Hike This Month
In the spillover from the U.S. Treasury selloff, Japan's 10-year yield climbed 5 basis points to 2.715% on Monday. Analysts said narrowing U.S.-Japan yield spreads and imported inflation are pushing up long-end Japanese yields. The Bank of Japan (BOJ) is widely expected to raise its policy rate again later this month to combat persistent inflation driven by high energy costs. Japan's Q1 GDP grew at a quarterly pace of 0.5%, accelerating from 0.2% in the prior quarter, while the April current account surplus beat expectations. Export growth continues to outpace imports, giving the BOJ additional room to tighten.
All eyes are now on the upcoming U.S. CPI release and Fed officials' speeches for clues on the exact timing and magnitude of a potential rate hike.