Treasury yields rose Wednesday, pushing bond ETF prices lower, after the ADP employment report showed stronger-than-expected private sector job growth, casting doubt on the Federal Reserve’s rate cut trajectory.

The rate-sensitive bond market proxy, the iShares 20+ Year Treasury Bond ETF (TLT) fell 0.8% after the report and is down 3% since the Fed’s jumbo rate cut Sept. 18.

In the preview to Friday’s larger jobs report, job creation showed a widespread rebound after a five-month slowdown, indicating that the labor market remains resilient, which increases the likelihood that inflationary pressures could persist, requiring the Fed to maintain its tight monetary policy stance.

Private employers added 143,000 jobs in September vs. 128,000 expected, according to internal data from ADP, a private payroll processing company.

Only one sector, information, lost jobs. Manufacturing added jobs for the first time since April.

As measured by Fed Funds Futures, the bond market is now pricing in a 25-basis-point rate cut at the next FOMC meeting, scheduled for Nov. 7. As recently as last week, a 50-bp cut was expected.

Fixed Income Investors to Focus on Friday’s Jobs Report

Fixed income investors are closely watching this Friday's U.S. nonfarm payrolls report to gauge the strength of the labor market and its potential impact on Federal Reserve policy. Here's what they are focusing on:

• Job growth: Investors are looking for signs of whether the labor market is cooling or remains robust. A stronger-than-expected report could suggest that the Fed may need to keep interest rates higher for longer, putting upward pressure on bond yields and pushing down bond prices. Conversely, weaker job growth could indicate economic slowing, which might prompt the Fed to consider future rate cuts, benefiting bond prices.

• Wage growth: The pace of wage growth is another critical component. High wage growth could fuel inflationary pressures, which would reinforce the case for maintaining higher rates. Slower wage increases, conversely, could signal easing inflation, leading to speculation about eventual rate cuts.

• Unemployment rate: The unemployment rate will be another key metric. A rising unemployment rate could imply that the labor market is softening, which might make the Fed more cautious about further tightening. Conversely, a decline in unemployment could indicate labor market resilience, keeping inflationary concerns alive.

In summary, fixed income investors are hoping for signals that inflation is continuing to cool, which could support a more dovish Fed stance and boost bond prices. However, if the report shows persistent labor market strength, it could reinforce the Fed's "higher for longer" narrative and negatively affect bond markets.