Up for four consecutive months! U.S. bonds strong in anticipation of Fed rate cuts

Market expectations for a Fed rate cut, with US bond prices rising for the fourth consecutive month.

According to the Bloomberg US Treasury Total Return Index, as of August 28th, the overall return rate of US bonds this month is 1.7%, poised to achieve a fourth consecutive month of increase. Since the end of April, as investors' expectations for a decrease in US borrowing costs have continued to rise, the index has been on the rise, with a cumulative increase of 3% this year. However, some traders are concerned that the Fed may cut rates later than the current market expectations.

On August 2nd, the US Department of Labor released data showing that the US added only 114,000 non-farm jobs in July, well below expectations, with the unemployment rate rising to 4.3%. Subsequently, the yield on the US ten-year Treasury bond hit a 14-month low of 3.67%. On Thursday, August 8th, the yield rebounded to 3.86%.

On August 23rd, Powell at the Jackson Hole Global Central Bank Annual Meeting said "the time has come," issuing the clearest signal of a rate cut in September to date, marking a key turning point in the Fed's two-year anti-inflation battle. Since July 2023, the Fed has kept the benchmark interest rate between 5.25% and 5.5%, the highest level in over 20 years.

Bond traders expect a cut of about 100 basis points this year, meaning that at every Fed policy meeting from now until December, there is a possibility of announcing a rate cut, including a significant 50 basis point cut.

This month, short-term bonds, which are more sensitive to Fed policy, have performed well. Currently, the yield on two-year Treasury bonds is 3.9%, only slightly higher than the yield on ten-year Treasury bonds by less than 2 basis points. In March 2023, this difference exceeded 100 basis points, the most severe yield curve inversion since 1981.

This wave of rising prices has raised some concerns, with some traders believing that the rebound has been excessive. The current risk is that if the US labor market remains stable thereafter, the Fed's pace of monetary policy easing may be slower than currently expected.

On Thursday, August 29th, strong US GDP for the second quarter and initial jobless claims for the week caused bond prices to fall and yields to rise, temporarily interrupting the rise in US bond prices. Meghan Swiber, a rate strategist at a US bank, stated:

"I am surprised by the shift in market sentiment, as the current data has not fully proven that the Fed will cut rates quickly and aggressively this year."

Currently, investors are closely watching the US inflation data to be released on Friday Eastern Time, as well as the employment data for August to be released next week