In the roller-coaster market in the first half of this year, US Treasuries are on the verge of breaking even.

Bloomberg has calculated the ROI of the world's largest bond market, which is currently down only 0.1% in 2024 and was down as much as 3.4% in April. The core reason for the rebound is that investors bet that a cooling of US prices will convince the Fed to cut rates earlier and more than officials have indicated, effectively curbing the rise in US bond yields.

Stephen Miller, an investment strategist at Sydney GSFM with forty years of market experience, said, 'We have seen the peak of US Treasury yields. US Treasuries are now back where they should be in a diversified asset portfolio.'

Since the beginning of this year, due to fears that US interest rates will rise for a long time, stimulating investors to sell US Treasuries, the yield on two-year US Treasuries sensitive to policy rose to over 5% in April. Since then, the yield on US Treasuries has fallen to around 4.70% because inflation and retail data show that the world's largest economy may eventually cool enough to lower rates.

According to the results of the swap, traders believe that the Fed will push for about two 25 basis point rate cuts this year, with fully priced-in first rate cut in November, despite some Fed officials saying on Tuesday that they need more evidence of easing price pressures before cutting rates.

If the economy develops as expected, the Fed's rate cut 'later this year' may be appropriate, said Fed director Quarles. St. Louis Fed President Mousalem said in his first important policy speech that data may take 'several quarters' to support rate cuts.

Reduced volatility.

Rachana Mehta, co-head of fixed income for Maybank Asset Management in the region, believes that the 10-year US Treasury yield will fluctuate within a wide range of 4.2% to 4.5%, and that buying at the top of this range is a good opportunity.

Mehta said, 'Given recent US data, the volatility we have seen in the past has settled down. You can continue to buy when the 10-year US Treasury yield reaches 4.4% to 4.5%'

As the Fed and investors have begun to converge their expectations for the number of rate cuts this year, volatility in the $27tn US bond market has fallen from recent highs. The ICE BofA MOVE index, which tracks bond volatility expectations based on options on US yields, has hovered around 98 points, below the April high of 121 points.

Desmond Fu, portfolio manager at Singapore's Western Asset Management, believes that the key is the shrinking gap between market expectations and Fed pricing. This reduces volatility.'

However, not everyone believes that the US Treasuries have room to rise. Barclays Bank's strategists advised earlier this month to bet against the 10-year US Treasuries as they bet on a rebound in US economic activity after two consecutive data disappointments.

Core PCE.

At the same time, swap traders believe there is over a 60% chance the Fed will cut interest rates in September at the earliest.

Padhraic Garvey, global head of debt and rate strategy at ING Financial Markets, believes that the market is currently closely watching the Fed's preferred inflation gauge (core PCE) released on June 28th, which is expected to show 'very mild' price pressures in May.

According to the median estimate of economists surveyed by Bloomberg, the annualized growth rate of core PCE in May will drop to 2.6%. This will be the lowest level since 2021.

Volatility is falling.