Traders Pull Forward First Full Fed Rate Cut to November Ahead of Jobs

(Bloomberg) — Bond traders pulled forward their expectations for the Federal Reserve’s first interest-rate cut, fueling a rally in Treasuries ahead of a key US jobs report that will shed light on the state of the economy.

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Money markets are fully pricing a quarter-point cut by November compared with December previously, and a 50% chance of a second reduction this year. The yield on two-year notes tumbled 16 basis points from a high earlier this week, their biggest two-day drop since January. The bonds were little changed at 4.88% on Friday.

Investors are recalibrating their wagers after Jerome Powell on Wednesday struck a less hawkish tone than some had feared, saying cuts can be expected once economic data provides clear evidence that inflation is moving downward. A strong report could prompt traders to reset their short positions though, with the market also preparing to digest $125 billion of supply in auctions next week.

US job creation has exceeded estimates for five straight months, and wage growth is still higher than pre-pandemic levels, putting upward pressure on consumer prices. The figures later will probably show employers boosted payrolls by 240,000 last month, according to the median estimate in a Bloomberg survey, less than the 303,000 added in March.

Treasuries have posted large swings in response to jobs data over the past year, and “I expect that historic volatility to hold if there’s a large surprise,” said Angelo Manolatos, an interest-rate strategist at Wells Fargo Securities LLC. “But in order to get a sustained rally, we need inflation data to start coming in on the softer side.”

The recent rally in Treasuries was fueled in part as traders exiting bearish wagers, positioning data show. The bullish sentiment flowed into Asia and Europe. German 10-year bonds are set for their first advance in three weeks, while equivalent UK notes are poised for the their first gain in six.

–With assistance from Matthew Burgess and James Hirai.

(Updates with latest market moves throughout.)

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