Markets are anticipating a Federal Reserve rate cut, leading to a fourth consecutive monthly increase in U.S. Treasury prices.

According to the Bloomberg U.S. Treasury Total Return Index, as of August 28, the overall return rate for U.S. Treasuries this month was 1.7%, on track for a fourth straight month of gains. Since the end of April, the index has been on the rise as investors' expectations for a decrease in U.S. borrowing costs have continued to heat up, with a cumulative increase of 3% for the year. However, some traders are concerned that the Fed may cut rates later than currently expected by the market.

On August 2, the U.S. Department of Labor released data showing that the U.S. added 114,000 non-farm jobs in July, significantly below expectations, and the unemployment rate rose to 4.3%. Subsequently, the yield on the 10-year U.S. Treasury note touched a 14-month low of 3.67%. On Thursday, August 8, the yield on the 10-year note rebounded to 3.86%.

On August 23, at the Jackson Hole Global Central Bank Annual Meeting, Powell signaled the most explicit rate cut for September with the phrase "the time has come," marking a key turning point in the Fed's two-year fight against inflation. Since July 2023, the Fed has kept the benchmark interest rate between 5.25% and 5.5%, the highest level in over 20 years.

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Bond traders are expecting approximately 100 basis points of rate cuts this year, which implies that rate cuts could be announced at every Federal Reserve policy meeting from now until December, including a substantial 50 basis point cut.

This month, short-term bonds, which are more sensitive to Federal Reserve policy, have performed exceptionally well. Currently, the yield on the two-year Treasury note is 3.9%, less than 2 basis points higher than the yield on the 10-year Treasury note. In contrast, in March 2023, this spread was over 100 basis points, marking the most severe yield curve inversion since 1981.

This rally has raised some concerns, with some traders believing that the rebound has been overdone. The current risk is that if the U.S. labor market remains stable, the Fed may ease monetary policy more slowly than currently anticipated.

On Thursday, August 29, strong economic indicators from the U.S. second-quarter GDP and weekly jobless claims led to a drop in Treasury prices and a rise in yields, temporarily interrupting the rally in U.S. Treasuries. Meghan Swiber, a U.S. Bank rate strategist, stated:

"I am surprised by the shift in market sentiment; the current data does not fully justify the market's expectation for the Fed to rapidly and aggressively cut rates this year."

Currently, investors are closely monitoring the U.S. inflation data to be released on Friday, Eastern Time, as well as the employment data for August to be released next week.