Boosted by expectations of a Fed rate cut, US bonds are expected to deliver their best performance in three years

According to the Zhitong Finance and Economics APP, as traders prepare for the Federal Reserve's first rate cut since 2020, U.S. Treasury bonds are expected to achieve their best performance in 3 years. The U.S. Treasury bonds total return index by Bloomberg shows that as of August 28th, U.S. Treasury bonds have risen by 1.7% this month, marking the fourth consecutive month of gains. Since the end of April, with investors' expectations of a rate cut by the Federal Reserve increasing, the index has been rebounding, with the year-to-date increase expanding to 3%.

After a sharp rebound following a significant drop earlier this year, U.S. Treasury bonds have rebounded significantly due to recent signs of slowing inflation and job growth, paving the way for the Federal Reserve to cut rates from near 20-year highs. Tiffany Wilding, an economist at Pacific Investment Management Company, stated: "The bond market is still a place worth paying attention to." "Despite the recent rebound, we see a lot of value."

At last week's Jackson Hole Global Central Bankers' Conference, Federal Reserve Chairman Powell acknowledged recent progress on inflation. Powell stated that he is confident that inflation is returning to the 2% track. He also said: "We are not seeking nor welcoming further cooling of labor market conditions, the upside risks to inflation have diminished, and the downside risks to employment have increased, now is the time to adjust policy." Such statements are seen by the public as a direct hint that the Federal Reserve will begin cutting rates in September.

Bond traders have already priced in a rate cut of about 100 basis points this year, meaning the Federal Reserve will cut rates at every policy meeting before the end of December, including a significant 50 basis point cut.

Short-term U.S. Treasury bonds sensitive to Federal Reserve policy have performed well this month, allowing the 2/10-year U.S. Treasury yield curve to escape inversion for the first time since July 2022: the 2-year U.S. Treasury yield is 3.9%, only slightly higher than the 10-year U.S. Treasury yield by less than 2 basis points. In March 2023, the 2-year U.S. Treasury yield was 100 basis points higher than the 10-year U.S. Treasury yield, marking the largest inversion since 1981.

However, some are concerned that the current rally in U.S. Treasury bonds has gone far enough. The current risk is that the labor market stabilizes from now on, providing room for the Federal Reserve to ease monetary policy at a slower pace than currently expected. On Thursday, after U.S. second-quarter GDP growth rate and initial jobless claims showed economic resilience, the rally in U.S. Treasury bonds stalled and pushed up U.S. Treasury yields Meghan Swiber, the interest rate strategist at Bank of America, stated, "I am surprised by the significant change in people's sentiment. However, so far, the data has not fully proven the correctness of the statement that 'the Fed will rapidly and actively cut interest rates this year.'"

The market is currently focusing on the U.S. July PCE inflation data to be released on Friday. In addition, the U.S. August non-farm payroll report to be published on September 5th will provide the latest clues about the U.S. labor market situation