Rate cut expectations are at a peak! Are US bonds rising too fast? The non-farm payroll report will reveal the truth on Friday

Due to the August ISM Manufacturing Index in the United States continuing to shrink less than expected, concerns about recession have risen again, triggering a full pullback in rate cut expectations by traders, leading to a significant rise in US Treasury bonds. On Tuesday, US Treasury yields fell across the board, with the 2-year Treasury yield dropping by 7 basis points to its intraday low. The 2-year Treasury yield has risen for four consecutive months since April, setting the longest continuous increase record since 2021. Since the end of April, boosted by rate cut expectations, the overall return on US Treasuries has exceeded 6%. For bond bulls, if the labor market remains resilient, it will suppress expectations of a significant rate cut by the Federal Reserve, making the upcoming non-farm payroll report on Friday a key focus. Ed Al-Hussainy, interest rate strategist at Columbia Threadneedle Investments, stated: "If you missed the big rise, chasing it now could be a bit dangerous." "The issue we face now is that the job market could either stabilize or deteriorate rapidly. This is the focus of debate in the second half of this year." Currently, economists generally expect the US non-farm payrolls in August to increase from 114,000 in the previous month to 165,000, with the unemployment rate expected to decrease by 0.1 percentage point to 4.2%, indicating a slight improvement in the labor market. It is worth noting that in the sub-index of the August ISM Manufacturing Index released overnight, the employment index showed a clear improvement. Analysts suggest that this may indicate that the non-farm payroll report on Friday will be stronger than expected. Traders are currently expecting the Federal Reserve to cut rates by a total of 100 basis points this year, meaning that in the remaining three FOMC meetings in 2024, there will be at least one rate cut of 50 basis points. However, the relevant data on the labor market is "mixed," with the latest report from the World Business Federation showing that job positions are not quite "adequate," while initial weekly jobless claims have remained stable for the first time in the past few months. Therefore, some opinions lean towards a weakening trend in bond prices. In a client report, a strategist at Deutsche Bank stated: "Given that the likelihood of the NBER (National Bureau of Economic Research) declaring an economic recession in the next 3-4 months seems low, a rate cut of over 200 basis points is difficult to justify when calmly examining the data." "With economic growth relatively slow, it is only when the market rapidly declines that there is reason to anticipate a significant rate cut." In addition, corporate bond issuances tend to increase after the summer, so bond yields in September are expected to show a seasonal upward trend, adding to market supply pressure. Historical data also shows that for bond investors, September has been the worst month in the past decade - the 10-year Treasury yield has risen 8 times in the past 10 years, with an average increase of 18 basis points