Traders are heavily betting on a rebound in US bonds ahead of the CPI announcement

According to the Zhitong Finance and Economics APP, bond investors who have been preparing for a rebound in the US bond market are seeking support from the US June CPI data to be released on Thursday. In the previous month, the weak May CPI data triggered one of the largest increases in US bonds this year. Market forecasters believe that the latest inflation data will increase the possibility of a rate cut by the Federal Reserve in September. The market currently predicts a 60% probability of the Fed starting to cut rates in September, with expectations of two 25 basis point rate cuts this year.

Position data shows that traders have been building bullish bets in the US bond market every day so far this month. Interest rate strategist Alyce Andres said, "Investors are cautiously entering the steepening trade of the US bond yield curve. This trade has frustrated them multiple times since December last year. Currently, the possibility of a rate cut is the main catalyst on the table. While the June CPI may provide reasons for the Fed to cut rates, stronger conviction may be influenced by the July CPI and the evolution of the employment situation."

Nathan Thooft, Senior Portfolio Manager at Manulife Investment Management, said, "If the data meets expectations or exceeds them, the certainty of a rate cut in September will become stronger." Economists Anna Wong, Chris Collins, and Stuart Paul also stated, "Taking a cue from Fed Chairman Powell's recent description of inflation, we expect the June CPI to be a 'very good' reading. This should set the stage for the Fed to start cutting rates in September."

Federal Reserve Chairman Powell reportedly said on Wednesday during his semi-annual monetary policy report hearing before the US House of Representatives that the Fed will not wait for inflation to slow to the 2% target before cutting rates. If they wait too long, inflation could be too low, well below 2%, which is not what the Fed wants to see.

When asked if the obstacles to rate cuts have been cleared, Powell said that although he is not ready to make a statement, he is confident about it, and recent data is encouraging. Powell emphasized that currently, the risks in the labor market are roughly equal to the risks of high inflation, and the Fed aims to achieve its goal of maintaining low unemployment while restoring full price stability.

Furthermore, the US bond market may also be influenced by US bond auctions. The US Treasury plans to auction $220 billion of 30-year US bonds later on Thursday. On Wednesday, the US Treasury auctioned $390 billion of 10-year US bonds, with overall auction results being robust and strong. The bid-to-cover ratio for the 10-year US bond auction was 4.276%, significantly lower than the 4.438% from the auction on June 11, marking the lowest level since May This time, the winning bid rate is 4.286% lower than the pre-issued rate by 1 basis point, indicating no tail spread reflecting weak demand, which is also the second consecutive time without a tail spread. The winning bid rate for the $58 billion three-year U.S. Treasury bonds sold on Tuesday was 4.399%, while the yield at the issuance deadline at 1 p.m. New York time was 4.407%, indicating that market demand for these bonds exceeded expectations