Evidence of a cooling U.S. labor market is conclusive, and the Fed's rate cut in September is almost certain, although the extent and speed of the rate cut are still controversial.
For bond traders, the extent and speed of the rate cut are a headache. Traders who once misjudged the Fed's pace of rate hikes find predicting rate cuts equally troublesome.
Currently, there is a serious difference of opinion in the market. On one hand, some believe that rate cut trades have already been made in advance, and the significant decline in U.S. bond yields has already priced in and digested the Fed's future rate cuts. On the other hand, some believe that the Fed's rate cuts may be more aggressive than market expectations, leaving room for U.S. bonds to rise. However, the consensus is that the future trend of U.S. bonds may depend on the pace of the Fed's rate cuts.
<h2>U.S. Bonds Leading the Way? Future Trends of U.S. Bonds May Depend on the Pace of Fed Rate Cuts</h2>
As the Fed's meeting on September 18 approaches, the market generally expects the Fed to cut rates for the first time since 2020, a expectation that has already driven a significant rise in U.S. bonds.
Currently, the yield on the policy-sensitive U.S. 2-year Treasury note has dropped from over 5% in April to around 3.7%, and the yield on the 10-year Treasury note has also come down from over 4.5% in April to around 3.7%. The soaring U.S. bond market has already reflected the market's pricing of future Fed rate cuts. Lower borrowing costs have also promoted the rise of corporate bonds and stocks, easing pressure on financial markets.
Some investors believe that U.S. bonds have already significantly outperformed the market.
John Madziyire, Senior Investment Manager at Vanguard, which manages $9.7 trillion in assets, said, &#34;The Fed needs to cut rates, everyone knows that, but the key is the speed. If the rate cut is too fast, it could lead to a reacceleration of inflation. He believes that the current bond market rally has been too rapid and has taken a 'tactically bearish short-term' stance.&#34;
Saira Malik, Chief Investment Officer at Nuveen, also suggested that the market may be too optimistic about the speed of the Fed's rate cuts, and believes that the yield on the 10-year Treasury note could rise from the current 3.7% to around 4%. Bob Michele of J.P. Morgan Asset Management also believes that the bond market has preempted the Fed's actions. While the economy is slowing, it has not deteriorated, and he prefers to invest in higher-yielding corporate bonds rather than government bonds.
However, Jamie Patton of TCW Group holds a completely opposite view. Patton believes that market expectations are not yet sufficient, and short-term U.S. Treasury bonds may still have room to rise. She said, &#34;The Fed will have to lower interest rates at a faster and more aggressive pace than the market expects.&#34;
Jeffrey Rosenberg, Senior Portfolio Manager at BlackRock, also issued a warning that the Fed's rate cut may exceed expectations. He said that if the Fed cuts rates by 50 basis points in September, it could signal concerns about the economy, potentially triggering significant market volatility
Bloomberg reported that despite the market's high expectations for a rate cut by the Federal Reserve, previous market judgments have been proven wrong multiple times. Traders have underestimated the extent of rate hikes by the Federal Reserve in the past, only to prematurely bet on a policy reversal by the Federal Reserve, resulting in new losses. The post-pandemic economic performance has exceeded expectations, causing predictions by the Federal Reserve and Wall Street to repeatedly fall short.
While risks still exist in the U.S. bond market, the consensus among multiple analysts is that the movement of U.S. bonds is related to the speed and extent of future rate cuts by the Federal Reserve.
<h2>What is the pace of rate cuts by the Federal Reserve?</h2>
Regarding the rate cut in September, Goldman Sachs commented in a research report on the remarks of Federal Reserve officials, stating that the leadership of the Federal Reserve believes that a 25 basis point rate cut in September is the baseline scenario.
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In our view, these remarks are consistent with our expectation of a 25 basis point rate cut by the Federal Reserve in September, but if the labor market continues to deteriorate, the Federal Reserve leadership is willing to cut rates by 50 basis points in subsequent meetings.
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According to the Wall Street Journal, Peter Cardillo, Chief Market Economist at Spartan Capital Securities, stated, &#34;The fact that over 100,000 new non-farm jobs were added in August weakens the possibility of a 50 basis point rate cut by the Federal Reserve in the September meeting. However, downward revisions in data from previous months indicate that the Federal Reserve needs to cut rates by at least 75 basis points this year.&#34; As the Federal Reserve still has three meetings to convene this year, a 25 basis point rate cut at each meeting would achieve the aforementioned target.
Regarding the pace of rate cuts for the whole year, data from the CME Group shows that while investors believe there is a higher likelihood of a 25 basis point rate cut by the Federal Reserve in September, they are actually betting that the Federal Reserve will cut rates by a cumulative 100 basis points or more by the end of the year.
Shenwan Hongyuan Securities believes that the pace of rate cuts by the Federal Reserve for the year is: 25bp+25bp+25bp. It points out that the pace of rate cuts by the Federal Reserve depends on economic fundamentals. The way the economy &#34;lands&#34; determines the downward slope and space of U.S. bond rates. In a recession, the Federal Reserve cuts rates by a larger extent. The direction of inflation is the main contradiction in the Federal Reserve's policy stance change. If the forces driving inflation rebound are temporary, rate cut trades are more likely to be repeated rather than reversed

The sharp rise in US Treasury yields poses a headache for traders. Some believe that the rapid rise in US Treasuries has already priced in a rate cut, leading to short-term downside risks. However, there are also analysts who think that the Federal Reserve may "play it differently" this time, with market expectations not fully priced in, suggesting that US Treasuries still have room to rise

- The US labor market shows clear signs of cooling, likely leading to a Federal Reserve rate cut in September, although the extent and speed of the cut remain debated among traders.
- Bond traders face a dilemma regarding the rate cut's magnitude and pace, with differing views on whether the market has already priced in the Fed's future actions or if there is still room for bond yields to rise.
- Market consensus suggests that the future direction of US bonds hinges on the pace of Federal Reserve rate cuts, with opinions divided on whether the market has preempted the Fed's actions or if there is further room for adjustment.

US Treasury Bonds taking the lead? The speed of the Fed rate cut may determine the "life and death" of US Treasury Bonds going forward