After a brief pause on Monday, US Treasury bond prices rebounded on Tuesday, with yields falling for as many as five days in the past six trading days due to investors' favorable attitude towards the sale of 20-year bonds, and as retail sales data continued to underperform, investors' expectations for two rate cuts by the Federal Reserve this year also continued to increase.

Market data shows that US Treasury bond yields of all maturities fell across the board overnight. Among them, the 2-year Treasury bond yield fell 4.9 basis points to 4.725%, the 5-year Treasury bond yield fell 5.9 basis points to 4.25%, the 10-year Treasury bond yield fell 5.8 basis points to 4.228%, and the 30-year Treasury bond yield fell 4.9 basis points to 4.359%.

The latest report released by the US Department of Labor on Tuesday shows that due to lower gasoline and auto prices, the revenue of gas stations and auto retailers has declined, and the May retail sales growth was lower than expected, increasing by only 0.1% month-on-month. The market's expectations were 0.2%, and April's data was further revised down from 0% to -0.2%.

In recent months, retail sales have been distorted by the earlier Easter this year. However, despite this, the slowing trend in sales growth has begun to emerge as rising commodity prices and interest rates force families to prioritize essential living expenses and reduce discretionary spending.

Matt Eagan, a portfolio manager at Loomis Sayles, said, "There seems to be increasing evidence that the US economy is slowing down. I was surprised by the resilience of the economy in the first quarter of this year. But now it seems we have reached a stage where the economy is marginally softer. This lays the groundwork for the Fed to truly take action (easing) at some point later this year."

In fact, since entering the second quarter, the cooling trend in the US economy has become more apparent. From weakened price pressures to sluggish retail sales and other economic indicators, they all support the Fed's rate cut. This also led to a striking phenomenon: despite the Fed's dot plot in June indicating only one rate cut this year, the pricing in the interest rate market still believes that the Fed will cut rates twice.

Data from the federal funds rate futures market shows that after the overnight release of US retail sales data, traders believe that the probability of a rate cut in September has further increased from about 60% on Monday evening to about 67%. The rate cut for the year is expected to reach more than 48 basis points, almost fully pricing in two rate cuts.

This change in interest rate pricing has actually been reflected in all aspects of the US Treasury bond market.

The US Department of the Treasury issued $13 billion in 20-year government bonds on Tuesday, and the final bid yield fell to 4.452%, far below the pre-issuance trading yield of 4.480% as of 1 pm Eastern Time. The bid-to-cover ratio was 2.74 times, higher than the average of 2.67 times for the past six sales. It can be said that the excellent performance of the 20-year Treasury bond auction further continued the hot demand for the 10-year and 30-year Treasury bond auctions last week.

In the past, 20-year Treasury bonds were usually the least popular type of US Treasury bonds. However, even such unpopular bonds have received hot demand from the market.

The sales situation shows that the primary dealers who have the obligation to purchase all unsold government bonds in order to prevent the auction from being annulled were only allocated 5.8%, the record lowest level since the reissuance of the same maturity government bonds in May 2020; the proportion allocated to indirect bidders rose to 77.9%, the second highest on record.

Many market participants said that bond traders are currently betting heavily on the possible sharp rise in US Treasury bonds, and have resumed the bullish trades that they fled from last week before the CPI data and the Fed decision were announced.

In the past week, the demand for futures contracts benefiting from the rebound in the bond market has soared again, and the momentum in the spot market has also been strengthened. A survey by JPMorgan showed that the US bond spot market showed the largest net long position in about a month. Position data shows that new emerging long positions dominated the bond market's rise last week. On Friday, the 10-year Treasury bond yield fell below 4.20% for the first time since April 1.

The number of open interest contracts also rose sharply. The mode of open interest contracts corresponds to short-covering, as the swap market has been re-priced based on the Fed's two expected rate cuts this year.

The data from the US Commodity Futures Trading Commission (CFTC) also reflects a similar trend. Prior to the release of last Wednesday's CPI data, asset management companies had been actively closing out short positions in futures that were tied to overnight financing rates, and they have turned net long for the first time since July 2023.

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