Due to the continued shrinkage of the August ISM manufacturing index in the USA, falling short of expectations, concerns about recession have resurfaced, and traders are fully pricing in rate cut expectations, leading to a sharp rise in US bonds.

On Tuesday, US bond yields fell across the board, with the 2-year US bond yield hitting a intraday low, down 7 basis points. The 2-year US bond yield has risen for four consecutive months, marking the longest continuous rise since 2021. Since the end of April, boosted by rate cut expectations, the overall return on US bonds has exceeded 6%.

For bond bulls, if the labor market remains resilient, it will suppress expectations of a large rate cut by the Federal Reserve, making the non-farm payroll report to be released on Friday a major focus.

Columbia Threadneedle Investments' interest rate strategist, Ed Al-Hussainy, stated:

"If you missed the big rise, then chasing the rise now could be a bit dangerous."

"The problem we are facing now is that the labor market could stabilize or deteriorate rapidly. This is the focal point of the debate in the second half of this year."

Currently, economists generally expect the number of non-farm jobs in the USA in August to increase from the previous month's 0.114 million to 0.165 million, and the unemployment rate to drop 0.1 percentage point from 4.3% to 4.2%, indicating a slight warming in the labor market.

It is worth noting that in the August ISM Manufacturing Subindex released overnight, the employment index showed a significant rebound. Analysts say this may indicate that Friday's non-farm payrolls report will be stronger than expected.

Traders are now forecasting that the Federal Reserve will cut interest rates by a full 100 basis points during the year, which means that in the remaining three FOMC meetings of 2024, there will be at least one meeting with a significant 50 basis point rate cut.

However, the relevant data in the job market is a mix of good and bad news. The latest data from the World Business Federation report shows that employment opportunities are not as plentiful, while the number of weekly applications for unemployment benefits has remained stable in recent months for the first time.

Therefore, some opinions tend to believe that the bond rally will weaken. In a customer report, Deutsche Bank strategist said:

"Given that the likelihood of the NBER (National Bureau of Economic Research) declaring an economic recession in the next 3-4 months seems unlikely, a judicious examination of the data makes it difficult to regard a rate cut of over 200 basis points as reasonable."

"The economy is developing relatively slowly, and it is only when the market falls rapidly that there is a reason to expect a significant rate cut."

In addition, the issuance of corporate bonds tends to increase after the summer, so bond yields in September will show a seasonal increase trend, which adds to the market's supply pressure.

Historical data also shows that September has been the worst month for bond investors in the past decade - the 10-year US Treasury yield has risen 8 times in the past 10 years, with an average increase of 18 basis points.

Editor/Somer