Three weeks of consecutive increases is just the beginning? Bullish bets on US bonds lowering interest rates to help rise, Thursday's non-farm report could be the "catalyst"

U.S. bond traders are working hard in the turbulent market, and they managed to make a profit by the end of the first half of the year. Now, after three weeks of consecutive gains, they are preparing for even more profits, with Thursday's jobs report likely to be a factor in driving this trend. The U.S. Treasury market ended its best single-month performance since February and posted its largest first-half gain in five years. Despite facing severe challenges from various complex factors, including the unpredictable policies of President Trump, tariff uncertainties, geopolitical conflicts, and downgrades from rating agency Moody's. Although trade negotiations are still in focus, some of the pressures have eased as the month approaches its end. Yields are near their two-month lows, with the benchmark U.S. 10-year Treasury at around 4.28%. Investors have largely ignored the impact of Trump's tax plan - which is set for a vote in the Senate on Monday after heated debates over the weekend - and instead are focusing on the Federal Reserve, expecting the Fed to cut rates at least twice this year. George Catrambone, head of the fixed income department at Deutsche Bank Americas, said, "The market tends to believe that the Fed will cut rates, while also somewhat worried about missing out." He noted that as Fed officials resume rate cuts after pausing in December last year, this situation is likely to occur. Catrambone has recently increased rate-related investments, including investments in 30-year U.S. bonds, in part because auction results show strong foreign demand for U.S. Treasuries. Earlier this month, some investors believed that the probability of a rate cut in July was close to zero, but now they expect a one in five chance of a rate cut in July, with a rate cut in September almost certain. Despite the Fed officials, including Chairman Powell, leaning towards waiting for clearer economic conditions before easing policy again, traders are prepared to act early if key indicators such as employment drop significantly while inflation remains under control. Interest rate options trading, indicating a likely decrease in yields and an accelerated pace of loosening by the Fed, has greatly increased, while asset management companies prefer holding U.S. government bonds with a maturity of around 5 years, as these bonds are expected to see a larger rally by 2026. Portfolio manager John Madziyire at Vanguard Group said, "Should the Fed become more aggressive in cutting rates, deteriorating labor market conditions will be needed. The key for July is the employment data, the only factor that can influence market trends." Madziyire remarked that holding U.S. government bonds with a maturity of 5 to 10 years "is attractive, as there are signs that the economy is slowing down, therefore the rate risk you take is compensated accordingly." The employment report for June will be released on Thursday. Economists predict that the report will show a slowdown in job growth to around 113,000 new jobs, compared to the 139,000 added the previous month. The unemployment rate is expected to slightly rise to 4.3%, although still within a manageable range, but this would be the highest since 2021. Such data releases may not compel the Fed to act, but would further prove that economic growth is slowing down. If the data released is weaker than expected, the situation could change drastically. Dan Carter, portfolio manager at Fort Washington Investment Advisors, said regarding the Fed's policy meeting next month, "If the employment data disappoints and there are no clear signs of tariff impact on inflation, I believe the situation in July could be more optimistic. But it could also be one of those situations that are difficult to predict, ultimately decided by the chairman, who may postpone the meeting until September." Brendan Fagan, Bloomberg's forex strategist, added, "Whether the Fed will implement rate cuts in July is still uncertain. But given the stagnant economic growth and the beginning of cracks in the labor market, the strategy of extending bond maturities seems increasingly reasonable." Market expectations for rate cuts by the Fed this year have fluctuated since December, with the median forecast of policymakers (unchanged in March and June) indicating that the rate range will fall to 3.75% to 4% by the end of the year, meaning two 25 basis point rate cuts. After recent gains, the market is currently consistent with Fed expectations. If the employment report exceeds expectations, there could be volatility. Trade issues are back in focus as the deadline for Trump's tariff increases on July 9 approaches, with the government sending mixed signals on the timing and extent of tariff hikes. Despite the rise in June, yields remain relatively stable, and current trading levels are much higher than the lows of April. Given the uncertainty in the macroeconomic environment, the Fed may adopt a wait-and-see approach, maintaining current yield levels. U.S. Bank said in its semi-annual report that 2-year yields will reach 3.75% this year and 4.5% for 10-year yields. On June 13, JPMorgan's rate strategist maintained the prediction that 10-year U.S. Treasury yields will reach 4.35% by the end of the year, which is higher than the current level. The bank expects the Fed to cut rates for the first time in December, followed by three more rate cuts early next year. However, investors remain wary of the possibility of the Fed missing the timing due to hesitation, fearing that the Fed may fall behind the evolving situation due to a lack of clear understanding of economic conditions. Fed Chairman Powell stated to Congress last week that the Fed could adopt a looser policy earlier, and if there is a significant downturn in inflation or job growth, the Fed will probably cut rates by at least two 25 basis points as they predict. The job market is a lagging indicator, which bond traders are also aware of. Matthew Hornbach, global head of macro strategy at Morgan Stanley, said in an interview last week that the bank expects 10-year U.S. Treasury yields to reach 4% by the end of this year, and "close to 3%" by the end of 2026. Although they don't see any loosening policies this year, the Fed will "cut rates significantly next year," when the temporary inflation impact brought by tariffs will fade, and the weakness in the labor market will truly show. Differing views among Fed officials - ranging from zero to three rate cuts this year and a wider range for 2026 - increase the possibility of policy errors, said Jamie Patton, co-head of TCW Group's global rate department. She prefers purchasing 2-year and 5-year bonds, as these bonds would benefit the most if the Fed cuts rates more than expected. Patton added, "There are a dozen pilots in the cockpit, each with different opinions on the flight altitude to the destination airport. If the flight destination is unclear, turbulence may occur during landing."