As the debate over whether the Federal Reserve can achieve a soft landing intensifies in the market, bond traders generally expect that the Federal Reserve will begin an interest rate cut cycle this week, with a possible rate cut of half a percentage point.

Market data on Tuesday showed that there was about a 55% probability that policymakers would announce a 50 basis point rate cut. This expectation was formed after unexpected retail sales data growth in August, which showed a recovery in consumer spending and increased uncertainty in the financial markets. This uncertainty will persist until the Federal Reserve announces their policy decision for September on Wednesday.

Brianna Urquhart, Chief US Economist at PuShin Bank, said in an interview, 'This decision is essentially a coin toss. A rate cut of 50 basis points tomorrow is possible.' She predicts that the Federal Reserve's economic projections summary may show a dot plot of a 100 basis point rate cut for the year.

However, traders have not reached a consensus on the magnitude of the rate hike in September. For months, the financial markets have been discussing the first rate cut by the Federal Reserve in four years, and economic reports and speeches by Fed officials have intensified this debate. Traders have already fully priced in an expected rate cut of a quarter percentage point, but with increasing speculation about the Fed's decision, they have begun to bet on a larger rate cut of 50 basis points in recent days.

The impact of rate cut expectations has already manifested in the US Treasury market. The Bloomberg Index shows that US Treasury yields are expected to decline for the fifth consecutive month, marking the best monthly performance since 2010. The decline in US Treasury yields has led to yields of almost all maturities, except for the 20-year Treasury bond, falling below 4% on Tuesday.

At 1:00 PM local time, there was weak demand for the auction of $13 billion 20-year bonds. The auction results showed a yield of 4.039%, two basis points higher than the yield at bidding deadline, indicating a lower-than-expected yield. Subsequently, long-term bond yields reached a new high.

Earlier on Tuesday, US retail sales unexpectedly rose in August, with this growth primarily driven by online shopping and overshadowing volatility in other retail sectors. At the same time, industrial production in August also exceeded expectations.

These data have put pressure on the US Treasury market. In early trading in New York in the afternoon, the two-year Treasury yield rose 4 basis points to 3.60%, while the ten-year Treasury yield rose 3 basis points to 3.65%. The US dollar also strengthened against most G10 currencies.

Bloomberg strategist Simon White commented, "Overall retail sales in August exceeded expectations, which aligns with strong leading indicators, but does not match the market's expectation of a 50 basis point rate cut by the Fed this week."

However, the forward market expects a policy easing of about 76 basis points at the November meeting, which means that interest rates will be lowered by 50 basis points in the next two meetings.

Over the next 12 months, traders have already factored in an expected rate cut of 243 basis points, which would bring the Fed's policy rate down to around 3% if this pace of cuts is realized.

Ashok Bhatia, Deputy Co-Chief Investment Officer at Neuberger Berman Group, said, "The rise in yields is justified as the market has already priced in a lot of policy easing." He added, "Based on what we currently know, it will be difficult for the Fed to achieve all of these targets."

Overall, there is uncertainty in the market regarding the Fed's rate cut expectations and decisions, and the volatility of economic data and officials' speeches will continue to influence traders' expectations and bets. The Fed's policy decision will be announced later this week, and the market will react to this key decision.

Editor/Rocky