Bond investors who’ve been positioning for a rally in the Treasury market are now looking for an endorsement from Thursday’s US inflation data.
Bullish bond wagers have been piling up as traders bet that the June consumer-price index will show a deceleration when released on Thursday. Adding to the report’s importance, Fed Chair Jerome Powell this week reiterated that interest-rate cuts are contingent on ebbing price pressures in the world’s biggest economy.
Last month, soft May CPI data set off one of the biggest Treasury rallies of the year when it bolstered expectations for lower borrowing costs in 2024. Markets are pricing in two quarter-point Fed rate cuts this year, and roughly 60% odds of the first one at the Sept. 18 policy meeting.
“If the data comes in in-line or better than expectations, the certainty of September becomes even stronger,” said Nathan Thooft, a senior portfolio manager at Manulife Investment Management in Boston.
US government debt has gained about 0.6% in July, according to data compiled by Bloomberg, adding to a two-month winning streak. Positioning data, meantime, has shown traders establishing bullish wagers on the bond market every day this month so far.
Separately, a trade emerged on Wednesday linked to the Secured Overnight Financing Rate that stands to benefit if markets start pricing in three rate cuts this year, rather than two. Trading in many of these options contracts is anonymous, which makes it difficult to identify the firms behind those bets, but data show the premium paid on the position amounts to approximately $2 million.
That leaves Thursday’s data with the potential to derail markets, especially after Powell’s remarks to lawmakers in Washington this week.
As part of his semi-annual testimony, the Fed chief said he was looking for more proof of ebbing inflation — but warned that lowering interest rates too little or too late could put the economy and the labor market at risk.
“Investors are cautiously wading into steepeners, which is a trade that has burned them multiple times since December. Right now, the potential for rate cuts is the main catalyst on the table. And while the June CPI data might add to the case for cutting rates, it won’t be the final straw. Fuller conviction will likely be a function of both the June and July CPI releases, the latter due Aug. 14, and the evolution of the employment landscape.”
— Alyce Andres, rates/FX strategist. Read more on MLIV.
The Treasury Department is also scheduled to conclude this week’s series of three debt auctions later on Thursday with a $22 billion sale of 30-year bonds.
Investors met $58 billion worth of three-year notes on Tuesday and a $39 billion reopening of 10-year notes on Wednesday with decent demand.
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