As inflation cools down, traders are increasing their bets on the Fed's rate cuts, and US bonds have erased all their declines so far this year. According to data, the Bloomberg US Bond Index has risen by 0.25% so far, while the cumulative decline of the index reached 3.4% when rate cut bets cooled down in April.

The US June CPI released on Thursday was lower than expected across the board, which reinforced the market's belief that the Fed will begin its rate cuts in September. Nick Twidale, chief analyst at ATFX Global Markets in Sydney, said, "We finally see recent US economic data being favorable to bond traders." "Over the next few weeks, Fed officials' comments will be closely watched, but it really feels like the time for US bond bulls has come."

Following the US June CPI announcement, the two-year Treasury yield sensitive to policies dropped as much as 13 basis points on Thursday to its lowest level since March. The market has completely digested the expectation of a Fed rate cut in September. Before the release of the US June CPI, the market expected a rate cut by the Fed in September by only around 70%. Chicago Fed President Charles Evans said on Thursday that the latest data was "very good," further proving that the Fed is moving toward its 2% inflation target. Shoki Omori, chief strategist at Sumitomo Mitsui Trust Bank, said this is the moment bond traders have been "longing for," and "Powell's dovish remarks are stimulating bond investors."

However, some strategists are cautious about the outlook for US bonds. Ronald Temple, chief market strategist at Lazard Ltd., said that the decline in longer-term US bond yields is "too large relative to fair value." He added that although the Fed may cut rates two to three times this year, the loose cycle may end with the federal funds rate at around 3.5% to 4%, indicating that the 10-year Treasury bond has "virtually no additional upside" from its current price levels.

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