Interest rate cut trading erupts, attracting $39 billion in a single month! Will tonight's non-farm payrolls report trigger another wave?

The price of US Treasury bonds has risen for the 7th consecutive trading day, with traders focusing on the upcoming non-farm payroll data to reinforce their view that the US will shift to rate cuts in September.

Due to concerns about a possible economic recession in the US, the market's bets on a Fed rate cut have increased, leading to a drop in the yield of the 2-year Treasury bond to the lowest level in 14 months. The benchmark 10-year Treasury yield has dropped below 4% for the first time since February, and the Bloomberg US Treasury Index reached its highest closing price in two years on Thursday. Asian bond markets rose across the board on Friday, with the Bloomberg US Government Bond Index set to achieve its longest consecutive increase since the market turmoil caused by the pandemic in early 2020.

Friday's US employment data is seen as the next catalyst for the bull market. Analysts expect the non-farm payroll report to show a slowdown in job and wage growth in July, highlighting the continued weakness in the labor market.

Damien McColough, Fixed Income Research Director at Westpac Banking Corp in Sydney, said, "The sentiment around US Treasuries is very positive, with momentum building this week. With the 10-year Treasury yield below 4%, the non-farm payroll numbers may be a decisive factor in determining how long the current uptrend can continue."

He added that "if the employment data suggests that the market's expectations for a rate cut are reasonable, then the 10-year Treasury yield could fall towards 3.8%."

Eugene Leow, Senior Rates Strategist at DBS Group Holdings in Singapore, stated, "The Fed will have to take a faster path to lower rates, and this concern is likely to intensify. With the growing concerns in the labor market, the market may be focusing on asymmetric risks."

As of the time of writing, interest rate futures indicate that the market is pricing in an 87 basis point rate cut by the Fed within the year, with a 13 basis point gap remaining for the bet on 4 rate cuts within the year. The probability of a 50 basis point rate cut by the Fed in September has risen to 33%. Fed Chairman Powell said on Wednesday that a rate cut could come as early as September.

As investors flock to the bond market in preparation for the start of the Fed's rate cut cycle, fixed income ETFs attracted a record amount of cash last month.

According to Strategas, bond funds saw inflows of around $39 billion in July, setting a historical record. Investors are pouring money into fixed income, from longer-term government bonds and short-term corporate bonds issued by US companies to municipal bond ETFs.

Todd Sohn, ETF strategist at Strategas, said, "People want bonds, and investors are also trying to take advantage of the opportunity as rates begin to decline, so prices are rising."Among them, the iShares 20+ Year Treasury Bond ETF (TLT) had the largest inflow, reaching $2.2 billion. The iShares Core U.S. Aggregate Bond ETF (AGG) also attracted over $2 billion in funds, while the Vanguard Total Bond Market ETF (BND) attracted approximately $1.9 billion. Meanwhile, according to Bloomberg compiled data, the iShares Broad USD High Yield Corporate Bond ETF (USHY) ranked at the top of the inflow list with $2.9 billion.

In summary, 2024 will be a year of massive capital inflows, and stock funds will also shine. Data from Strategas shows that stock ETFs attracted $78 billion last month, making it the highest inflow month since December last year. Bloomberg Intelligence strategists recently predicted that, given the strong momentum in the first six months of this year, 2024 may become a record year for ETF flows. So far this year, inflows into U.S. ETFs have exceeded $538 billion, with the potential to surpass the $911 billion hoarded in 2021