(Bloomberg) -- Treasuries rose after revised US employment data and minutes from the Federal Reserve’s latest policy meeting reinforced wagers on interest-rate cuts starting next month.
The gains pushed the yield on policy-sensitive two-year Treasuries down about eight basis point to 3.91% as minutes from the July Fed gathering showed several officials saw a case for lower borrowing costs. Traders are once again pricing in more than 1 percentage point worth of easing by the end of this year, starting at the September meeting.
“The bottom line is that the Fed is cutting interest rates on Sept. 18,” said Peter Boockvar, chief investment officer at Bleakly Financial Group, “with the only question being whether it will be 25 or 50 basis points.”
A Bloomberg gauge of Treasuries has surged 1.7% this month as investors hunt for clues that Fed officials will kick off their easing cycle next month. The yield on policy-sensitive two-year notes has fallen more than 25 basis points so far in August.
That sentiment caught steam after a record of the Fed’s July gathering highlighted a sense among policymakers that risks to achieving their inflation and employment goals are now about equal.
“There was no detailed discussion on the size of the September cut, but I suspect that the Fed will retain optionality,” said Omair Sharif, president of Inflation Insights. “Early September will bring another payrolls report, as well as another set of inflation data that will inform the outlook.”
Earlier on Wednesday, revised data — which was released more than a half-hour later than expected — showed US job growth was probably far less robust in the year through March than previously reported.
The number of workers on payrolls will likely be revised down by 818,000 for the 12 months through March — or around 68,000 less each month — according to the Bureau of Labor Statistics’ preliminary benchmark revision released on Wednesday. While many economists anticipated a downward revision, those at Goldman Sachs Group Inc. predicted a decline of up to a million jobs.
“The revisions give the Fed another reason to cut rates in September,” said Thomas di Galoma, head of fixed-income trading at Curvature Securities. “I am leaning toward a 50-basis-point cut in September due to this report. I believe the Fed will want to comfort markets with larger rate cut for their first move.”
The updated data comes as policymakers and traders alike scour data on the US labor market. Fed officials have recently touted their dual mandate as they approach the start of their easing cycle, and the July employment report sparked a sharp rally in the Treasuries market.
Swaps traders are fully pricing in a quarter-point cut next month — and a nearly 30% chance for a half-point reduction.
“The employment data since March 2024 has weakened, so this latest news is another reason to support a 50 basis points rather than a 25-basis-point initial rate cut,” said Joseph Lavorgna, chief economist at SMBC Nikko Securities.
Bond traders have been taking on a record amount of risk as they bet on a Treasury market rally tied to the Fed’s rate cuts. The number of leveraged positions in US government bond futures has risen to an all-time high ahead of the annual economic symposium in Jackson Hole, Wyoming, which will commence on Thursday.
Meanwhile, a $16 billion auction of 20-year bonds on Wednesday was met with decent investor demand.
--With assistance from Alexandra Harris and Edward Bolingbroke.
(Updates rates throughout and adds detail from FOMC minutes.)
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