Traders Add to Bets on Jumbo Fed Cuts as Data Fuels Bond Rally
US Treasuries gained and traders ramped up their bets that the Federal Reserve will opt for a supersized interest-rate cut this month after a mixed report on the US labor market.
The advance pushed the yield on two-year Treasuries, which is more sensitive than longer maturities to changes in the Fed’s policy outlook, lower by as much as 11 basis points to 3.63%. Traders also boosted their bets on a half-percentage-point rate reduction later in September to about 50%, from roughly 36% before the data.
US government’s August employment report showed job creation slowed, coming in below forecast. Prior months were also revised lower and the unemployment rate fell.
“This is the third soft employment report in a row and it doesn’t help that the two-moth revision was down again,” said Tony Farren, managing director in rates sales and trading at Mischler Financial Group, adding that it opens up the possibility of a 50 basis point cut.
“The market might have been right this time overestimating how aggressive the Fed is going to be,” he added.
Swaps traders boosted the odds of the US central bank reducing rates by a half percentage point when they gather later this month in the widely expected first cut in over four years. For all of 2024, the contracts now imply about 117 basis points of reductions — up from around 108 basis points earlier in the session.
There’s risk of more volatility through the session as traders are on alert for any signals on monetary policy’s path from Fed officials during the day.
Immediately after the jobs data, New York Fed President John Williams said that it is now appropriate for the central bank to reduce interest rates, without indicating the size, in a speech prepared for an event held by the Council on Foreign Relations in New York Friday. Fed Governor Christopher Waller will also speak at the University of Notre Dame.
“We really like listening to governor Waller” as “we think he’s probably the second most important voice at the Fed,” Aditya Bhave, senior US economist at Bank of America Corp. said on Bloomberg Television prior to the data release Friday.
“If the markets are between 25 and 50 we would expect clear guidance from Waller,” said Bhave, which with his colleagues at BofA is forecasting a 25 basis point cut by the Fed this month.
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