Bond Traders Brace for Data Deluge Amid Fed Rate Cut Expectations

Bond Traders Await Crucial Data Amid Rate Cut Hopes

Bond traders are bracing for an upcoming deluge of data that will clarify market expectations for how quickly the Federal Reserve will continue to cut interest rates, an anticipation that has propelled US Treasuries to their biggest rally since 2020.

The end of the US government shutdown means agencies will begin releasing key reports that have been delayed since early October, including the September non-farm payrolls report, due this Thursday.

During the shutdown, the lack of official data made it difficult to judge the economy's trajectory. However, data from private sources, such as payroll processor ADP, continued to highlight a weakening labor market, which prompted the Fed to lower benchmark interest rates at its September and October meetings, ending a nine-month pause.

The risk is that government data could be surprisingly positive, showing companies adding jobs at a faster-than-expected pace. Also, data could be incomplete or distorted due to the shutdown.

With policymakers still wary of high inflation, this could lead them to hold interest rates steady at their December 10 meeting or dampen market expectations for rate cuts in 2026.

“As economic data starts to come through, there is a chance that the labor market may show more resilience,” said Priya Misra, portfolio manager at JPMorgan Investment Management. “Then the market may further reduce its bets on a December rate cut, and volatility could also rise.”

She said they see a rise in the 10-year Treasury yield to 4.25% as a buying opportunity.

This year, US Treasuries have risen sharply due to slowing employment and uncertainty brought on by US President Trump’s trade war, while the US economy has surprised forecasters with its strength in recent years. US Treasuries have returned about 6% this year after traders increased bets on rate cuts and yields declined.

But Fed Chairman Powell has said the central bank's recent moves are primarily precautionary measures to ensure its tight monetary policy does not stifle growth, rather than a stimulant aimed at boosting the economy.

Last week, futures traders lowered the probability of a 25-basis-point rate cut in December to below 50% as some Fed officials hinted that the move was far from a done deal. This near-term uncertainty has pushed up a measure of expected bond market volatility, which had previously been hovering near four-year lows.

“While it’s not a big issue right now, there’s increasing concern that the Fed may not cut in December, given the timeliness and quality of the economic data,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. He said this, coupled with falling yields, “makes us lean toward a neutral stance on US Treasuries.”

The exact release dates for some of the delayed data, as well as the November jobs report typically released in the first week of the following month, are currently unclear. The US Labor Department said last week that it may take some time to finalize the release dates.

Fund managers have also noted some positive economic changes that could push Treasury yields higher, including the Supreme Court potentially ruling Trump’s tariffs invalid.

However, they generally expect that even if the Fed pauses action next month, officials will remain inclined toward maintaining an accommodative monetary policy, which could prevent Treasury yields from rising significantly from recent levels. Also, as data show the US economy slowing, market sentiment toward Treasuries has been relatively bullish.

Some recent options trades are betting that the 10-year Treasury yield will fall below 4%. JPMorgan’s Treasury client survey for the week ended November 10 showed net long positions at their highest level since April 7. Investor demand for new 10-year and 30-year Treasury bonds issued last week was also in line with recent averages.

“Unless growth and labor data re-accelerate, it’s hard to push 2-year and 10-year Treasury yields beyond recent ranges,” said George Catrambone, head of fixed income at DWS Americas. “There is no obvious reason right now to expect a strong rebound in the labor market.”