Strong CPI data may pose certain risks to the US short-term bond market.

Bond traders are on high alert for a high-risk U.S. inflation report that could undermine their bets on a series of sharp interest rate cuts by the Federal Reserve starting this month and continuing until 2026. Weak employment data and moderate producer price data have led traders to believe that a 25 basis point rate cut by the Fed at the meeting on September 16-17 is a certainty, with potentially two more similar cuts before the end of the year. However, market views on the balance of economic risks have shifted - current positioning shows that traders expect Fed officials to ultimately lower rates below the neutral level, stimulating economic growth through this policy maneuver to prevent a recession. This marks a significant shift: for much of the past year, traders have been reluctant to bet on such a large-scale easing policy due to sticky inflation. The current market expectation environment has significantly increased attention to the consumer price index report due to be released on Thursday. The report is expected to show that core annual inflation is well above the Fed's target. In the previous month, the U.S. bond market continued to rise, pushing two-year Treasury yields to their lowest level since April, and the current risk is that investors may have become overly optimistic. Ed Al-Husseini, portfolio manager of Columbia Threadneedle Global Return Bond Fund, said, "The pricing in the short end of the bond market reflects expectations of a weakening economy, not concerns about inflation. If market focus shifts back to inflation, the short end of the bond market could face some risks if inflation data shows strength."