By Colin Barr

Treasury yields were flat on Monday, after a soft U.S. non-farm payrolls report before the three-day holiday dampened market expectations for a Federal Reserve increase to interest rates.

The 2-year yield (US2YT=RR), most sensitive to Fed rate expectations, was at 4.129% and the 10-year yield TVC:US10Y was at 4.486%.

The 10-year yield was above 4.5% on Thursday, its highest since June 23, before the June jobs report showed employment expanding by 57,000 jobs for the month, which was barely half the average estimate from economists polled by Reuters.

The rally in Treasury prices marks the latest lurch in rate sentiment that began the year with expectations for Fed rate cuts and then swung to rate increases after a series of hot inflation readings and a hawkish first press conference from new Fed chief Kevin Warsh.

The soft jobs report on Thursday renewed hope among analysts and investors that rates won't necessarily be rising for the balance of 2026 — an outcome that could help equities at a time when the breakneck rally in chip shares appears to have cooled.

"By the time we get to the Fed’s meeting on July 28-29, a lot can change. In fact, a lot already has changed," said Brian Jacobsen, chief economic strategist at Annex Wealth Management.

"The relatively soft June jobs report and oil prices falling back towards pre-conflict levels have already taken some of the steam out of rate-hike expectations. The Fed will not release an updated dot plot at the July meeting, but it wouldn’t be surprising if there are hints that their pessimistic view of inflation has changed."

Traders on Monday put the odds of a rate increase by the September Fed meeting at 56%, down from 64% last Thursday.

With consumer spending remaining strong throughout the Iran war, analysts remain mostly optimistic about the prospects for continued economic expansion — which is likely a market-friendly recipe for rates staying put through the second half of the year.

"For a couple of months people were spending $20 or $30 or $50 more a week at the pump and it didn't seem to affect them," said Guy LeBas, chief fixed income strategist at Janney Capital Management in Philadelphia.

With economic strength in evidence, it's reasonable to assume that the case for rate cuts is off the board for now, which together with the cooling labor reading from last week is likely to lead to what he called "a stalemate environment in which you'll see rates chop around."

The U.S. auctioned 3-month and 6-month bills on Monday. Later in the week, the Treasury will auction 3-year, 10-year and 30-year debt. LeBas said the strong rally in U.S. stocks since the Iran war is likely to be good for auction demand at the margin, as portfolio managers move some of their profitable investments into lower-risk categories such as Treasury securities.

"There's no reason to think 10s or 30s should have a problem this week," he said.