Treasuries gained as investors awaited data on the US labour market and remarks from a Federal Reserve official for more clarity on the path of monetary policy.

Yields fell across the curve, with Fed rate-cut bets little changed on the day. German and UK bonds also advanced, led by the short-end, as money markets priced slightly more easing from the European Central Bank (ECB) and the Bank of England (BOE) this year.

Bond markets swung wildly in the past days as investors became more worried about the outlook for the US economy after a bleak jobs report last week. An initially powerful rally later lost steam and now traders are looking for more clues on the state of the world’s largest economy and how the central bank will react. 

That has raised the stakes for Thursday’s US initial jobless claims due at 8.30am New York time, which are expected to have fallen a tad to 240,000 in the week ended Aug 3 from 249,000 the period prior. Last week, payroll data showed hiring slowed and the jobless rate climbed to an almost three-year high.

“Given last week’s payrolls, we are on high alert for US employment data,” Deutsche Bank AG strategists including Jim Reid wrote in a note. 

The strategists added the market will be watching a US$25 billion auction of 30-year Treasuries at 1pm as “the final test of investor appetite for US government bonds this week”. 

On Wednesday, a US$42 billion sale of new 10-year bonds saw weaker demand than expected, and drew a yield that was well above the pre-sale indicative level. A US$58 billion auction of three-year notes earlier in the week attracted decent demand.

Later in the day, the focus will be on Federal Reserve Bank of Richmond president Thomas Barkin, who speaks at 3pm. He said last week after the US jobs report that the economy is in good shape, though it’s unclear whether the labour market is getting back to normal rates of hiring or more seriously deteriorating.

Still, bearishness in the market is growing. JPMorgan Chase & Co now sees a 35% chance that the US economy will tip into recession by the end of this year, up from 25% at the start of last month.

“The market is struggling to digest all of these news to make something of a new macro scenario of them,” said Andres Sanchez Balcazar, head of global bonds, Pictet Asset Management. “What we have seen really is an unwind of a lot of more complacent consensus trades that were out there in the market.”

Swaps are currently pricing 112 basis points (bps) of easing from the Fed this year, compared with about 65bps just over a week ago, with the chance of a half-point cut in September seen at 70%. The yield on 10-year notes traded at 3.91%.

For the ECB, expectations are for 72bps of additional easing this year, with a quarter-point cut fully priced in September, and for the BOE, traders expect another 48bps of cuts. Both central banks have already lowered rates by a quarter point this year. 

“We still think that the market is pricing in too much from the Fed in terms of rate-cut expectations,” said Mohit Kumar, managing director at Jefferies International Ltd, who forecasts a quarter-point cut in September and 50bps in total in 2024. We “would be fading the move at the front end.”

  - Bloomberg