Treasuries are rallying, with some tenors trading at the lowest yields in months, as investors see economic data cementing the case for three Federal Reserve interest-rate cuts this year.
The 10-year note’s yield fell below 4% for the first time since February on Thursday after manufacturing and jobless claims data reinforced the idea that the US labor market is cooling.
Swaps traders fully priced in 75 basis points worth of easing by the Fed this year — anticipating a quarter-point reduction at each of its three remaining policy meetings.
The shift precedes Friday’s release of US employment data for July, which will be closely watched by traders and policymakers alike.
Treasury debt returned 2.2% in July — its best monthly performance since December — with a final boost Wednesday from Fed Chair Jerome Powell’s comments after the latest policy meeting. Powell indicated a rate cut will be on the table in September because inflation has slowed, and said the central bank is prepared to respond to weakening labor-market conditions.
However the Treasury market has markers of crowded positioning based on expectations of a hefty easing cycle ahead of the July employment report. Strong data could therefore spur a back-up in rates as bullish bets are trimmed.
“The most important number tomorrow’s going to be the employment rate — and if that goes up, that is going to send out a lot of alarm bells,” Subadra Rajappa, head of US rates strategy at Societe Generale, said on Bloomberg Television.
This article was provided by Bloomberg News.