Bond traders await US inflation data to reinforce bullish wagers

Investors who’ve positioned for even more gains in the Treasury market are looking for US inflation data that reinforces the case for a faster pace of Federal Reserve interest-rate cuts.

Traders are split on whether the central bank will opt for a quarter- or half-point reduction in September, with swaps pricing in 36 basis points worth of easing. In all, they see about one percentage point worth of cuts in the remaining months of 2024.

Bullish wagers re-emerged in the world’s biggest bond market ahead of a reading of the consumer price index for July later on Wednesday. That leaves traders prepared for a further rally on figures that show price pressures continuing to ebb. 

“I honestly think there’s compelling arguments on both sides,” Deutsche Bank’s chief US economist Matthew Luzzetti said on Bloomberg Television, referring to the debate over 25- or 50-basis-point cuts. “They are restrictive, the inflation data is telling them there’s not as much upside inflation risks. And then it depends on whether or not the economy is as resilient as we think.”

The yields from policy-sensitive two- to 10-year benchmark Treasuries were trading below 4% on Wednesday, loitering above the lows touched during last week’s bout of market tumult.  

Yields moved on Tuesday after the producer price index rose in July by less than forecast, reflecting the first decline in services costs this year amid an ongoing moderation in inflationary pressures. That leaves the market optimistic for more signs of softening inflation at the consumer level — and vulnerable to unwelcome surprises. 

Open interest, or the amount of risk taken on by futures traders, has started to rise in some tenors over the past couple of sessions, consistent with fresh long positions after an aggressive period of liquidations across the Treasury curve. Meanwhile, in the cash market, JPMorgan Chase & Co.’s Treasury client survey released Tuesday showed net long positions among clients at their most since December. 

Economists expect the consumer price index for July at both headline and core level to expand at a pace of 0.2% from a month earlier. To George Catrambone, head of fixed income at DWS Americas, a hotter-than-expected print stands to spook traders into paring back their bets on aggressive Fed easing. 

On Tuesday, Atlanta Fed President Raphael Bostic said he’s looking for “a little more data” before supporting a reduction in interest rates, emphasizing he wants to be sure the US central bank will not have to change course once it begins cutting.

“The broader economy seems to be cooling, and alongside that we’re seeing inflation start to moderate more meaningfully,” said Mona Mahajan, senior investment strategist at Edward Jones. “The data thus far isn’t pointing to any urgency for a 50 basis point rate cut.” 

In the wake of softening US employment data earlier this month, the bond market has moved decisively beyond the Fed’s rate cut forecast of 50 basis points of easing for this year. Next, market participants will scour Fed Chair Jerome Powell’s comments at the annual central bank symposium held in Jackson Hole later this month and the next US labor report in early September.

“Good inflation readings equals a 25-basis-point cut for September, but another uptick in the unemployment rate and further weakness in next month jobs report would likely skew pricing,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities.