Recovering from the annual decline, are US bonds completely turning around?

With the release of the US CPI and PPI in June, the market's optimistic sentiment about declining inflation is rising, and the US bond market is experiencing a new turning point.

This week, the US bond yield curve has declined, with the two-year US Treasury bond yield falling by 15 basis points to 4.45%, the lowest level since March. The US bond index rose by 0.3%, marking the first positive return this year. The index had previously plunged by 3.4% in early April, but has now erased all losses.

The main reason for this change is the latest inflation data, with the CPI in June showing the lowest increase in three years. Although the PPI released on Friday was slightly higher than expected, market participants are more concerned about the decline in consumer confidence. Traders are starting to accept the idea of three rate cuts this year, driving the bond market rebound.

Sinead Colton Grant, Chief Investment Officer at New York Wealth, said, "All signs indicate that the Fed will start cutting rates in September." She mentioned that against the backdrop of a weak labor market report in June, market reactions to the Consumer Price Index and recent testimonies by Fed Chairman Jerome Powell to US lawmakers all point to this. Powell stated this week that the Fed is becoming increasingly vigilant about potential risks in the labor market, while waiting for more evidence of inflation slowing down.

John Madziyire, Senior Portfolio Manager at Vanguard, pointed out, "Clearly, many people missed the peak yield of 4.75%, and now the market is filled with the fear of missing out (FOMO) sentiment, and more believe that yields will continue to decline." He believes that the Fed's policy is working and the market is adjusting its expectations.

Molly McGown, Interest Rate Strategist at TD Securities, said, "Overall, we believe that rates will continue to decline, entering a phase of loose policy."

However, Mohamed El-Erian, President of Queens' College, reminded market participants to remain cautious. He pointed out that the upcoming presidential election could complicate the Fed's decisions. Former President Trump's strong performance in debates with Biden and his proposed high tariffs and anti-immigration policies could all fuel inflation.

In recent market dynamics, political factors have had a particularly noticeable impact on the bond market. Since the debate, short-term bonds have outperformed long-term debt, and the steepening yield curve reflects market concerns about the potential increase in long-term bond risk premiums due to Trump's policies.

Subadra Rajappa, Head of US Interest Rate Strategy at Societe Generale, said, "Although investors do not have a strong conviction on duration, steepening of the curve remains the most popular trading strategy."