By Davide Barbuscia

U.S. Treasury yields dropped on Thursday on concerns over a weakening U.S. labor market, as well as the prospect of more economic uncertainty caused by the government shutdown in Washington and questions over the legality of President Donald Trump’s tariffs.

The U.S. government shutdown, the longest on record, has forced investors to rely on private data in place of the Bureau of Labor Statistics’ monthly jobs report, which was due last Friday but has been frozen by the shutdown. On Thursday, a batch of private labor indicators pointed to a weakening economy, driving Treasury yields lower and boosting expectations for Federal Reserve interest-rate cuts.

U.S. employers announced 153,074 job cuts in October, global outplacement firm Challenger, Gray & Christmas said on Thursday. The job cuts represented a 183% surge and were the highest October total in 22 years, as companies slashed costs and embraced artificial intelligence, signaling a potential shift toward more layoffs.

The Revelio Public Labor Statistics, a privately compiled indicator of the labor market, showed the U.S. economy lost 9,000 jobs in October, predominantly driven by losses in the government sector. The Chicago Fed estimated the U.S. jobless rate likely inched up to 4.4% in October, a four-year high, as hiring slowed and layoffs rose.

“Given the fact that the jobs market has been in a little bit of a lull here, dating back to May, if this is an indication of the near-term direction, it’s a warning for the markets,” said Jim Baird, chief investment officer with Plante Moran Financial Advisors, referring to the Challenger jobs data.

The shutdown, now in its 37th day, added uncertainty to the economic outlook, said Baird, as the longer it lasts, the greater its likely impact on the economy. “Does the sentiment shift in a more negative direction? Do consumers retrench further, particularly if they’re concerned about the overall labor market situation? … It has to be factored in the longer the shutdown lasts.”

Rates futures traders on Thursday assigned a 70% probability that the Fed will cut rates by 25 basis points at its December 9-10 policy meeting, up from 62% on Wednesday, CME Group data showed.

Benchmark 10-year yields US10Y and two-year yields (US2YT=RR) both dropped by about seven basis points to 4.089% and 3.562%, respectively. Further out the yield curve, 30-year yields (US30YT=RR) declined by nearly five bps to 4.686%.

The MOVE index MOVE, a measure of expected volatility in U.S. Treasuries, has risen in recent days but remains close to the four-year low hit at the end of October.

Despite market concerns over a weakening labor market, Chicago Fed President Austan Goolsbee said the lack of official data on inflation during the government shutdown accentuated his caution about cutting rates further. Cleveland Fed President Beth Hammack was similarly cautious about future rate cuts, she said on Thursday, due to ongoing high levels of inflation.

Inflation expectations for the next five years, as measured by the breakeven inflation rate of five-year Treasury Inflation Protected Securities (US5YTIP=RR), have been ticking modestly higher in recent weeks, from 2.315% on October 20 to about 2.4% this week.

SUPREME COURT CONSIDERS TARIFFS CASE

Investors are also assessing the potential impact of a U.S.

“The IEEPA (International Emergency Economic Powers Act) court case kicked off yesterday, and markets quickly priced in a high probability that tariffs will need to be reversed,” said John Madziyire, head of US Treasuries and TIPS at Vanguard.

On the prediction market Kalshi, odds that the Supreme Court would uphold Trump’s tariffs fell to 24% on Thursday from over 30% late on Wednesday.

U.S. Trade Representative Jamieson Greer said on Thursday that some plaintiffs could get a refund in certain situations if the U.S. Supreme Court rules against the tariffs, but the Treasury would have to figure out any payment schedules.

Trump said he would consider a ‘game two’ plan if the Supreme Court rules against the legality of tariffs.

Lower revenue from tariffs could lead to wider government budget deficits and more Treasury debt supply hitting the markets, which would be negative for bonds. At the same time, the prospect that tariffs may be permanently revoked could be positive for Treasuries as it would remove a cause of inflation.

“Early indications from the U.S. Supreme Court indicate skepticism over the legal standing of Trump’s tariffs and the obvious question is whether this is bond-bearish or bullish. Yes, both,” BMO Capital Markets analysts said in a note.