US Bonds Climb as Traders Look to Jobs Data to Back Big Fed Cuts

(Bloomberg) — Treasuries rose ahead of a closely watched US jobs report, with speculation mounting that the Federal Reserve will opt for a half-point interest-rate cut this month if the data shows the economy is weakening.

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Short-maturity notes led the advance, driving the two-year yield to within striking distance of the 10-year equivalent. This portion of the yield curve is watched as a recession indicator, and briefly ended an inversion this week. The yield on 30-year securities slipped just below 4%, the lowest level this year.

Traders are coming around to the view that the Fed will kick off its easing cycle on Sept. 18 with a large cut to make sure the economy doesn’t stall, and are pricing a roughly one-in-three chance of a half-point move. Labor market data earlier this week showed hiring slowed markedly in July, reinforcing the need for easier policy.

“All eyes are on Friday’s employment report,” said Jonathan Cohn, head of US rates desk strategy at Nomura Securities International. The data Friday is expected to show a moderate pickup in the pace of job growth, according to economists surveyed by Bloomberg, with the median projection showing a 165,000 gain in August payrolls.

Friday’s gains in the bond market add to a rally in Treasuries that has seen yields fall across the curve from their highs in April. The Bloomberg US Treasury Index has soared 7.5% since then, while the yield on policy-sensitive two-year notes has plunged by around 130 basis points to 3.72%.

Still, there is heightened uncertainty surrounding the outcome of the Fed decision, and whether market pricing has gone too far. Options tied to the Secured Overnight Financing Rate show that open interest — or the amount of positions owned by traders — has surged across a number of contracts that expire ahead of the Fed’s policy announcement.

The bond market is “desperate for signs that the Fed is going to provide medicine before the patient is sick,” said Tom Tzitzouris, head of fixed income research at Strategas Securities. But “anything short of a material miss to the downside” on the payroll report would lead to the unwinding of the bets on a 50 basis point cut, he added.

After the report, traders’ attentions will turn to messaging from policymakers, who’ve demonstrated a greater focus on the labor market. New York Fed President John Williams is due to speak shortly after the jobs report on Friday, while Fed Governor Christopher Waller is scheduled to speak later in the day.

–With assistance from Liz Capo McCormick, Elizabeth Stanton, Ye Xie, Edward Bolingbroke, James Hirai and Aline Oyamada.