(Bloomberg) — US bond traders gutted through turbulence to somehow find themselves notching profits as the first half ends. Now, they’re setting up for more gains following a three-week winning streak, with Thursday’s jobs report as a potential catalyst.
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The Treasury market is wrapping up its best monthly return since February and its biggest first-half stretch in five years. That’s despite some harrowing moments caused by a laundry list of cross-currents, from President Donald Trump’s erratic policies to tariff uncertainties, geopolitical eruptions and a Moody’s downgrade.
While trade negotiations remain in the spotlight, some of the other pressures have eased as the month ends. Yields are near two-month lows, with the benchmark US 10-year note around 4.28%. And investors have largely shrugged off the implication of Trump’s tax plan — which is set to face a Senate vote as soon as Monday after a weekend of wrangling in the chamber — to focus on the Federal Reserve, which they expect will cut interest rates at least twice this year.
“There’s a market lean towards the Fed cutting rates and a bit of a fear of missing out,” when central bankers eventually resume their rate-easing cycle after pausing since December, said George Catrambone, head of fixed income at DWS Americas. Catrambone has been adding interest-rate exposure, including the 30-year in recent weeks, in part as evidence from auctions shows foreign demand for Treasuries remains intact.
Investors who earlier this month saw a July rate cut as negligible are now pricing in nearly 1-in-5 odds for a reduction, with September seen as a lock. Even as Fed officials including Chair Jerome Powell favor waiting for clarity on the economy before easing again, traders are positioning for the possibility of earlier action should key measures such as employment weaken materially and inflation stay under control.
Rates options trades flagging the potential for lower yields and a faster pace of Fed easing have picked up markedly, while asset managers favor owning Treasuries in the five-year maturity range that would benefit from an eventual bigger Treasury rally extending into 2026.
“For the Fed to be more pro-active in cutting rates requires labor market deterioration,” said John Madziyire, portfolio manager at Vanguard. “July is all about payrolls and it’s the one thing that can move the market.” Madziyire said owning Treasuries due in five to 10 years was “attractive as there are signs of the economy slowing, so you are being compensated” for taking on interest-rate risk.
The June employment report, due on Thursday given the July 4 holiday on Friday, is forecast to show growth in the workforce easing to about 113,000 new jobs from 139,000 the prior month, according to economists surveyed by Bloomberg. The unemployment rate is seen nudging up to 4.3%, and while still contained, would mark a fresh peak since 2021.
A reading like this probably wouldn’t force the Fed’s hand, though it would add to evidence of slowing growth. A softer report would be a different story.
“If we get a weaker payroll number and we get inflation that still doesn’t show a lot of signs of tariffs, then I think July can be live,” said Dan Carter, portfolio manager at Fort Washington Investment Advisors, referring to next month’s Fed policy meeting. “But it could be one of those where it’s a close call, and the chair gets his way and they push it to September.”
What Bloomberg strategists say …
Whether the Fed follows through with cuts as early as July remains to be seen. But with growth stalling and the labor market starting to show cracks, the bid for duration looks increasingly justified.
— Brendan Fagan, FX Strategist, New York
Expectations for Fed rate cuts this year have waxed and waned since December. But policymakers’ median forecast — which didn’t change in March and June — was that the band would decline to 3.75% to 4% by the end of the year, implying two quarter-point cuts.
After recent gains, and with the market now in line with the Fed’s forecasts, there’s a risk of a hiccup should the jobs report surprise on the upside. Trade is also back in focus ahead of Trump’s July 9 tariff deadline, with the administration sending mixed signals on the timing and severity of levies.
In spite of the June rally, yields are relatively range bound and trading well above their April lows given the macro economic uncertainty that could keep the Fed on the sidelines. Bank of America in their mid-year update said two-year yields will end this year and 2026 at 3.75%, not far from where they are now, with the 10-year at 4.5%.
JPMorgan Chase & Co.’s rate strategist on June 13 maintained the firm’s call for 10-year yields to reach 4.35% by year-end, higher than where they are now. The bank expects the first Fed rate cut in December, followed by an additional three consecutive cuts early next year.
Treasuries were little changed across maturities in early Asia trading on Monday.
Behind the Curve?
Investors, though, are alert to the prospect that the Fed ends up being behind the curve by waiting for a clearer view on the economy.
Powell himself told Congress last week that the Fed can ease sooner and deliver their forecast of at least two quarter-point cuts should hard data in the form of either inflation or job creation significantly weaken. And the jobs market is a lagging indicator, a point not lost on bond traders.
Matthew Hornbach, global head of macro strategy at Morgan Stanley told Bloomberg Television last week that the firm sees the 10-year yield ending this year at 4% and “closer to 3%” by the end of 2026. Hornbach said that while they don’t see any easing this year, the central bank “will cut a lot next year,” once the temporary inflationary impact from tariffs passes and weakness in the labor market really emerges.
Disagreements among Fed officials –- who see between zero and three cuts this year and an even wider range of outcomes in 2026 — increases a chance for a policy mistake, said Jamie Patton, co-head of global rates at TCW Group. She’s favoring two- and five-year notes, which would benefit the most from a scenario where the Fed eases more than expected.
“There are over a dozen pilots sitting in the cockpit and they’re all disagreeing around the altitude of a destination airport,” Patton said. “That increases the potential for a bumpy landing if you don’t know where you’re going.”
–With assistance from Edward Bolingbroke and Carter Johnson.
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