Treasuries poised for longest winning streak in three years

Treasuries are poised for their longest monthly winning streak in three years as traders look past US data on personal income and expenditure due Friday and prepare for the Federal Reserve to start cutting interest rates.

US government bonds returned 1.5% in August through Thursday, set for a fourth month of gains that would be the longest run since July 2021, according to the Bloomberg US Treasury Total Return Index. The gauge has been rallying since the end of April, extending this year’s gain to almost 3%, as investors have grown more confident in the case for lower US borrowing costs. 

The bond index has bounced back from its 2.3% loss in April as signs of cooling inflation and easing job growth have given the Fed more scope to cut rates from the highest level in more than two decades. Bloomberg Economics sees Friday’s report on personal income and outlays reviving talk of a “Goldilocks” economy, and expects the Fed to cut interest rates by 50 basis points in September, followed by another jumbo reduction before year-end.

Treasury 10-year yields slipped to a 14-month low of 3.67% in early August following weaker-than-expected US payroll data, before climbing back to 3.86% on Friday. Treasuries were little changed on the day.

“The bond market is still an interesting place to be,” Tiffany Wilding, an economist at Pacific Investment Management Co., said in an interview on Bloomberg Television. “We see a lot of value despite the recent rally.”

At the Jackson Hole symposium last week, Fed Chair Jerome Powell said “the time has come for policy to adjust,” marking a turning point in the central bank’s battle against inflation. The Fed has kept the benchmark rate in the range of 5.25% to 5.5% since July 2023. 

Swap traders are pricing in about 100 basis points of easing this year, which implies a reduction at every remaining policy meeting through December, including one 50-basis-point cut. 

Short-term notes, which are more sensitive to the Fed’s policy, outperformed this month, leaving a key section of the yield curve on the verge of turning positive for the first time since July 2022. The two-year yield is less than five basis points above its 10-year counterpart. The gap was more than 100 basis points in March 2023, the deepest inversion since the 1980s.

Treasuries’ winning streak has some concerned that the rally has gone on long enough. The risk now is the labor market stabilizes, spurring the Fed to ease monetary policy slower than the market is anticipating.

The run paused on Thursday after second quarter US GDP growth and weekly jobless claims pointed to a resilient economy.

The month will end with the release of the PCE measure of inflation that is closely followed by the Fed. But the key read on the economy and labor market will come at the end of next week with the August payroll data.

“It’s amazing to me just how much sentiment has shifted,” said Meghan Swiber, a US rates strategist at Bank of America Corp. But the data so far hasn’t fully justified “the narrative that the Fed is going to deliver very swift, aggressive cuts this year,” she said.