Crestone Mortgage Economic Commentary: June 6, 2025
Labor Market Update: May 2025 Jobs Report
The U.S. labor market exhibited resilience in May 2025, adding 139,000 nonfarm payroll jobs, surpassing expectations of 125,000. The unemployment rate held steady at 4.2%, maintaining its position near historic lows. Average hourly earnings increased by 0.4% to $36.24, marking a 3.9% year-over-year rise, outpacing inflation and supporting consumer spending.
Job gains were concentrated in service sectors, notably healthcare (+62,000), leisure and hospitality (+30,000), and social assistance (+16,000). Conversely, manufacturing, retail, and construction sectors showed weaker performance, with the federal government shedding 22,000 jobs due to administrative cuts.
Despite the positive headline figures, underlying data revealed some cautionary signs. The labor force participation rate declined to 62.4%, and the labor force shrank by 625,000 individuals. Additionally, job gains for March and April were revised downward by a combined 95,000.
Banking Regulation and Treasury Market Implications
In a significant policy development, Federal Reserve Vice Chair for Supervision Michelle Bowman outlined a comprehensive plan to reform and ease bank oversight regulations. She criticized the current supervisory methods as overly subjective and punitive, especially toward large banks that meet capital and liquidity requirements but still receive unsatisfactory ratings. Bowman proposed revising the ratings framework, reducing the weight of subjective assessments, and reassessing capital requirements, including leverage rules affecting low-risk assets like U.S. Treasury debt.
Complementing this, Treasury Secretary Scott Bessent proposed reducing the supplementary leverage ratio (SLR) for banks. The SLR, implemented post-2008 financial crisis, requires large U.S. banks to maintain 5% capital against all assets, including U.S. Treasuries. Lowering the SLR could make it easier for banks to hold more Treasuries and lend more freely, potentially easing borrowing costs and stimulating economic growth.
These regulatory changes aim to enhance banks’ capacity to invest in Treasury securities, potentially stabilizing the Treasury market amid rising yields. However, market reactions have been mixed. While some analysts view these measures as supportive of economic growth, others caution that banks may remain hesitant to increase Treasury holdings due to recent financial instability and preference for short-term securities.
Implications for Mortgage Markets
For mortgage lenders and borrowers, these developments carry significant implications. If banks increase their holdings of Treasuries, demand for these securities could rise, potentially leading to lower yields. Since mortgage rates are closely tied to Treasury yields, particularly the 10-year note, this could result in more favorable mortgage rates.
However, the effectiveness of these regulatory changes in achieving the desired outcomes remains uncertain. Banks’ actual investment behaviors, broader economic conditions, and ongoing fiscal policies will all influence the trajectory of Treasury yields and, by extension, mortgage rates.
Conclusion
The May 2025 jobs report indicates a steady labor market with areas of strength and emerging caution. Simultaneously, proposed regulatory reforms aim to enhance banks’ capacity to support the Treasury market, with potential downstream effects on mortgage rates. Crestone Mortgage will continue to monitor these developments to provide clients with informed guidance in navigating the evolving economic landscape.