Inflation cooling boosts rate cut bets, US bonds erase all year-to-date losses
Due to the cooling of inflation and bets on the Fed rate cut, US Treasuries have erased all their losses so far this year. The US June CPI data came in below expectations, deepening market confidence in a Fed rate cut in September. Bond traders and investors are optimistic about the outlook for US Treasuries, but some strategists are cautious about the longer-term decline in US bond yields. Overall, the time for a bullish position on US Treasuries has arrived, but the upside for the 10-year Treasury is limited
According to the Zhitong Finance and Economics APP, as inflation cooling prompts traders to increase bets on the Fed rate cut, US Treasuries have erased all declines so far this year. Data shows that the Bloomberg US Treasury Index has accumulated a 0.25% increase; whereas back in April when the rate cut bets cooled down, the index had accumulated a 3.4% decline.
The US June CPI released on Thursday was below expectations across the board, solidifying the market's belief that the Fed will start cutting rates in September. Nick Twidale, Chief Analyst at ATFX Global Markets in Sydney, said, "We are finally seeing recent US economic data favoring bond traders." "In the coming weeks, the remarks of Fed officials will be closely watched, but it does feel like the time for long positions in US Treasuries has arrived."
Following the release of the US June CPI, the policy-sensitive two-year US Treasury yield fell by as much as 13 basis points on Thursday to its lowest level since March. The market has fully priced in the expectation of a Fed rate cut in September. Prior to the release of the US June CPI, the market estimated only about a 70% chance of a rate cut by the Fed in September. Chicago Fed President Charles Evans said on Thursday that the latest data is "very good," further proving that the Fed is moving towards its 2% inflation target. Shoki Omori, Chief Strategist at Resona Securities, also stated that this is the "long-awaited moment" for bond traders, with "Powell's dovish remarks stimulating bond investors."
However, some strategists are cautious about the outlook for US Treasuries. Ronald Temple, Chief Market Strategist at Lazard Ltd., said that the drop in longer-term Treasury yields is "too large relative to fair value." He added that although the Fed may cut rates two to three times this year, the easing cycle may end with the federal funds rate around 3.5% to 4%, meaning that the 10-year Treasury "has almost no additional upside potential from current price levels."