US bonds achieve best monthly return in over half a year, future trend to be determined by PCE data

Notice that US bond investors are experiencing their largest monthly gain since July of last year, and a series of upcoming economic data will determine whether they can maintain this profit. This week, the rise in US bonds pushed the yield on the benchmark 10-year US bond to touch 4.22% on Friday, the lowest level since December of last year. A series of weak economic growth indicators have reignited expectations for the Federal Reserve to resume interest rate cuts after pausing rate hikes recently. Currently, the market focus has shifted to the Personal Consumption Expenditures Price Index (PCE) for January, which is expected to show a slowdown in growth, as well as the employment report next week. As of Thursday's close, the recent decline in yields has pushed the Bloomberg US Treasury Bond Index to rise by 1.7% in February. This is also the best start for US bonds since 2020, with the index rising by 2.2% so far this year. This shows how quickly the wealth landscape of the world's largest bond market is changing. Just over a week ago, the 10-year yield was above 4.5%, and due to fears that the trade war could boost inflation, the market believed that this level could attract sellers. However, a series of weak secondary economic indicators in the US, threats of tariffs by President Trump, and federal government job cuts have become the main driving factors. Brian Quigley, senior investment portfolio manager at Vanguard, said: "The market is forward-looking and focused on the chain reaction of government layoffs. If they cut spending, they will cut funding for other projects, and government contractors may also be negatively affected." Investors have exited bearish positions, with activities in the US bond options market indicating bets on the 10-year yield falling below 4%. Morgan Stanley strategists say that this could happen if investors believe the Fed will cut rates by another percentage point (twice the current expectation). This could happen if hiring trends slow down, pushing up the unemployment rate. The first batch of important data for February, including the employment report, will be released next week. Currently, the Fed is still on hold due to inflation rates exceeding its long-term target of 2%. However, if a choice must be made between supporting economic growth and fighting inflation, "the Fed will focus on growth," Quigley said. "Whether they will ease policy in a growth panic, the market will price in a more aggressive Fed easing policy." Citigroup's measure of the deviation from economist expectations reached its most negative level this week since September of last year. George Catalono of DWS Americas, head of fixed income, said the company bought 10-year US Treasuries in January when the yield reached 4.8%, but this week their view on 10-year US Treasuries has turned neutral. As for inflation, the PCE data expected to be released on Friday is predicted to show the core inflation rate monitored by the Fed slowing down for the first time in four months. Janet Ryland, senior portfolio manager at Allspring Global Investments, said concerns about inflation could keep the 10-year yield between 4.25% and 4.75%. "The labor market is basically balanced, but inflation is stubborn," she said. "The issue of inflation still needs to be addressed," "We believe inflation presents risks to the fixed income market. We feel the situation in this regard is still unclear." The ICE BofA MOVE index, which measures the implied volatility of a basket of fixed income assets, has risen to a six-week high due to changes in Fed policy expectations. Later on Friday, bond markets may receive support from index funds and other passive investors' end-of-month purchases. The month-end rebalancing of the bond index (adding securities sold this month and removing securities no longer meeting criteria) is expected to provide a boost to its duration (a key risk indicator) above the average level, with adjustments taking effect at 4 p.m. New York time. Although sellers are prepared for this event, if demand exceeds expectations, it could still lead to price increases. Duration is expected to increase by 0.12 years, compared to the monthly average of 0.08 years over the past year, due to the large-scale quarterly auctions of 10-year, 20-year, and 30-year Treasury bonds in February.