After the latest data shows that the US economy is resilient, traders have lowered their expectations for a substantial rate cut by the Fed this year, and the yield on US Treasuries has surged.

The main factors driving the rise in US Treasury yields are better-than-expected retail sales and initial jobless claims data this week, with the two-year Treasury yield rising by 16 basis points to nearly 4.12%.

Traders have reduced their bets that the Fed will sharply cut rates in September, and expect the next rate cut to be less than 30 basis points. They now expect the Fed to cut rates a total of 92 basis points over the remainder of 2024, lower than the 100-plus basis points before the data was released.

The sharp volatility in US Treasury yields this week reflects widespread debate in the market about whether the Fed will begin its expected easing cycle next month and whether it will cut rates by 25 or 50 basis points.

Lindsay Rosner, fixed-income head of multiple departments at Goldman Sachs Asset Management, said, "The market is focusing on every data point and trading because we are getting closer and closer to September, and just a few months ago people were discussing when the Fed's policy could turn. September trading is very crowded, and you've seen this volatility because opinions about what the Fed will do are diverging."

US July retail sales growth exceeded expectations, indicating that consumers remain resilient despite rising prices and borrowing costs. Meanwhile, US initial jobless claims fell for the second straight week, reaching their lowest level since early July.

The bond market had expected soft retail sales data, and the two-year Treasury yield remained below 4%, with inflation data earlier showing some easing of price pressures.

Ahead of the data, the outstanding contracts in 10-year US Treasury futures, which had been increasing in bullish positions recently, surpassed 5 million for the first time. The data suggests that bullish bets may come under some profit-taking pressure, prompting selling, as traders seek to lock in profits if the odds of a 50-basis-point Fed rate cut diminish.

Tom di Galoma, head of fixed income trading at Curvature Securities, said, "The market is overvalued and yields have dropped sharply. Quick money has been selling since the data was released."

As traders pushed the two-year Treasury yield to 4.10%, the yield has returned to the level seen in early August and selling pressure has extended to other maturities of US Treasuries, with the 10-year Treasury yield rising by 11.5 basis points to 3.95%. However, if US Treasury yields continue to rise, it is expected that many people will choose to buy, as the Fed is likely to begin cutting rates at its September meeting.

Matthew Miskin, co-chief investment strategist at John Hancock Investment Management, said, "This is the beginning of a rate-cutting cycle. If yields rise, we will seize the opportunity. We want to prepare our investors for 2025."

Fed Chairman Powell will speak at the central bank's annual symposium in Jackson Hole, Wyoming, next week. After that, the next important data point will be the release of the US nonfarm payrolls report in early September.

Di Galoma said, "There is still a lot of uncertainty about what the Fed will do in September."

As currency markets simultaneously reduced bets on the size of rate cuts by the European Central Bank and the Bank of England, European bonds followed US Treasuries lower. The yield on 10-year German government bonds rose by 7 basis points to 2.25%, while the yield on 10-year UK government bonds rose by 10 basis points to 3.93%.

The surprisingly strong US economy also boosted the dollar. Bloomberg's dollar spot index rose 0.4%, reversing earlier losses that had sent the index to its lowest level since April earlier this week.

Editor/Lambor