Due to the increased possibility of investors evaluating a 50 basis point rate cut by the Federal Reserve next week, US Treasury bond prices rose, driven by short-term notes. Last Friday, the yield of the two-year US Treasury bonds, sensitive to policy changes, fell 5 basis points to 3.59% in the Asia market, while $U.S. 10-Year Treasury Notes Yield (US10Y.BD)$ falling 3 basis points to 3.65%, causing the US dollar to decline and supporting major currencies.

The Federal Reserve is expected to lower the benchmark interest rate for the first time in over four years after the two-day meeting ending next Wednesday. Traders have differing opinions on whether the Fed will cut rates by 25 basis points or 50 basis points, but many are leaning towards the latter.

Prashant Newnaha, Senior APAC Rates Strategist at TD Securities in Singapore, said, "The market is speculating again that the Federal Reserve may cut interest rates by 50 basis points at next week's meeting, which has boosted bids for US Treasury bonds." He added that the Fed may further lower rates by 50 basis points due to the federal funds rate being significantly higher than the bank's estimated neutral level.

Overnight index swap pricing indicates a 33% probability of a 50 basis point cut in the federal funds rate. The market has been debating whether Fed policymakers will consider a 25 basis point or 50 basis point cut, with the likelihood of the latter increasing recently.

Damien McColough, Head of Interest Rate Strategy at Westpac Banking Corp., said, "The market has once again debated the possibility of starting an easing cycle with a 50 basis point cut, and given that the Federal Reserve is in a blackout period ahead of the Federal Open Market Committee (FOMC) meeting, the market is paying close attention to the information conveyed in certain media articles."

Former New York Fed President William Dudley reiterated the position of the traders. He said, "There are compelling reasons" to support a more substantial cut than usual. Dudley left the New York Federal Reserve Bank in 2018 and is now Chairman of the Bretton Woods Committee and a Bloomberg columnist.

Due to the preferred inflation indicators of the Federal Reserve, which have fallen from a high of over 7% two years ago to near the long-term target of 2%, it is almost certain that the Federal Reserve will cut interest rates next week. Disappointing economic data in the United States, including an unexpected decrease in job vacancies, also provide further basis for interest rate cuts.

Newnaha said, "If the Federal Reserve cuts interest rates by 50 basis points, the market is unlikely to see it as a one-size-fits-all approach, but will expect the Federal Reserve to further cut interest rates by 50 basis points." He said that in this case, "yields are expected to decline significantly."

The Bloomberg Dollar Spot Index fell 0.2%, while the Thai Baht and Korean Won currencies rose by more than 1%.

Editor/Rocky