Bond rally holds gains as traders price fed rate cut next month

by Edward Bolingbroke and Carter Johnson 

US Treasuries held onto gains after traders boosted bets that the Federal Reserve will cut interest rates at its next meeting. 

Tuesday’s inflation report, largely seen as benign by investors, and a chorus of US officials calling for lower borrowing costs bolstered the case for a reduction in September.  

Interest-rates swaps now fully price in a quarter-point move next month, with some traders piling into bets on it being 50 basis points. The benchmark 10-year yield ended the Wednesday session six basis points lower at 4.23% before trading little changed Thursday.  

The rally showed how market sentiment has shifted dramatically from two weeks ago, when expectations for a September cut were less than 50%. That started to change in the aftermath of a weak payrolls report — culminating in the firing of the Bureau of Labor Statistics commissioner — which intensified President Donald Trump’s campaign to force the Fed to bring borrowing costs down.  

Treasury Secretary Scott Bessent added to that call on Wednesday, urging policymakers to use the September meeting to kick off a cutting cycle. “We could go into a series of rate cuts here, starting with a 50 basis point rate cut in September,” Bessent said in a television interview on Bloomberg Surveillance Wednesday. “We should probably be 150, 175 basis points lower.” 

Chicago Fed President Austan Goolsbee said the fall meetings will be “live” as policymakers weigh mixed economic data. 

“The market tone has shifted to easing mode,” said Angelo Manolatos, a rates strategist at Wells Fargo. “While the CPI report was far from a slam dunk for the Fed, it does keep the central bank on track to cut in coming months.” 

What Bloomberg Strategists say... 

“Yields are tumbling across the curve and fed funds futures are pricing in steeper cuts. Rate expectations, in other words, are falling hard.” 

—Sebastian Boyd, Macro Strategist, Markets Live 

For weeks, investors have piled into swaps, options and outright Treasury longs to wager that subdued inflation and weakness in the labor market will allow the Fed to start cutting. 

That’s also helped fuel bets that the Fed will reduce rates by more than 25 basis points in September. Traders added some $2 million in premium on Tuesday to a position in the Secured Overnight Financing Rate (SOFR) that would benefit from such a move.  

Investors are now turning their focus to the Fed’s annual symposium in Jackson Hole, Wyoming, where Chairman Jerome Powell is slated to speak.  

“The market is convinced of at least a 25bp cut in September,” said Leah Traub, a portfolio manager at Lord Abbett. “If the Fed is not as convinced, then Powell’s speech at Jackson Hole is likely the time to express that.” 

Tuesday’s report on inflation was far from an all-clear for the Fed. Though a tepid rise in the costs of goods tempered concerns about tariff-driven price pressures, underlying US inflation accelerated in July by the most since the start of the year.  

With more than a month remaining until the central bank’s September 16-17 meeting, Treasury bulls will also need to weather another major inflation report as well as key employment data. 

“September is not a done deal,” Claudia Sahm, chief economist at New Century Advisors, said on Bloomberg TV. “We do not have the data that puts this one in the bag yet.” 

For now, however, bets on a dovish Fed are taking the spotlight. The options trade linked to SOFR September contracts — where premium now stands at roughly $5 million — could pay off as much as $40 million should they price in a 50 basis point rate cut for that month, Bloomberg calculations showed. 

Read More: Relentless Buying Seen in Dovish SOFR Play, Tops 150,000 Options 

Meanwhile in the cash market, investors unwound long positions in the build-up to the inflation data, shown by a survey of JPMorgan Treasury clients covering the week up to Aug. 11. 

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