According to most economists and traders, the world's largest bond market, the US Treasury trading market, is experiencing a "super turning point." As traders fully price in the expectation of two rate cuts by the Federal Reserve this year, and even some traders begin to price in the optimistic expectation of three rate cuts this year, the yields of various Treasury bonds have dropped sharply. A benchmark index measuring the trend of US Treasury prices wiped out all its losses in 2024, and the market's confidence in the continued decline in yields is growing. This rebound in Treasury prices has even pushed the two-year Treasury yield to its lowest level since March.

This week, the sentiment related to the fall in inflation and the weakness of the labor market has been fully reflected in the US Treasury market. The interest rate traders' judgment on the Federal Reserve's interest rate path is becoming increasingly clear, rather than the situation of huge differences in interest rate path judgments for most of this year. With the latest economic data widely regarded by economists as supportive of the view that the Federal Reserve will cut interest rates twice by September and December, and even in the view of some strategists that a rate cut will be announced in November, the yields of US Treasury bonds of various maturities have fallen across the board.

Data shows that the two-year US Treasury yield fell 15 basis points to 4.45% this week, the lowest level since March. Short-term US Treasuries such as the two-year Treasury are more sensitive to the Federal Reserve's monetary policy expectations than long-term US Treasuries of 10 years or more.

The widespread rebound in US Treasury prices this week has helped the Bloomberg US Treasury Index, which measures the overall trend of US Treasury prices, to wipe out all its price losses in 2024 and push its return rate to 0.3%, even eliminating its decline in April this year, which was as high as 3.4%.

The yields of various Treasury bonds have fallen across the board, especially the 10-year Treasury yield, which is known as the "anchoring of global asset pricing," continues to decline, which undoubtedly helps the value of risk assets such as stocks, cryptos, and high-yield corporate bonds to continue to grow. As the 10-year Treasury has large trading volume and stable yield, it is considered a pricing anchor in the market. From a theoretical perspective, the 10-year Treasury yield is equivalent to the risk-free rate indicator r in the important valuation model of the stock market-DCF valuation model-denominator end. If the yield of the 10-year Treasury bond is lower and other indicators (especially cash flow expectations of the numerator end) do not change significantly, the valuation of global tech stocks, high-yield corporate bonds and other risk assets will continue to grow.

"All signs indicate that the Federal Reserve will cut interest rates starting in September," said Sinead Colton Grant, chief investment officer of BNY Wealth. "You see the market's response to the latest CPI in the context of the weak June labor market report and Fed Chairman Powell's recent dovish testimony before the US Congress."

It is understood that Powell told Congress this week that Fed officials are increasingly vigilant about potential risks to the labor market, and are waiting for more evidence of a slowdown in inflation. Powell emphasized that the Fed has made significant progress in combating inflation and may not need to cut interest rates until the inflation rate drops to 2%. Powell has avoided any strong signals on interest rates, but he emphasized that policy makers face the risk of action that is too fast or too slow.

The inflation data released on Thursday showed that the CPI growth rate in June fell to its lowest level in three years, which, together with Powell's comments and last week's weak employment data, pushed bond market prices sharply higher this week.

Although the data released on Friday showed that the PPI growth rate in June was slightly higher than market expectations, market participants were more concerned about the significant decline in consumer confidence indices released on Friday. Therefore, the yields of various Treasury bonds continued to fall on Friday.

"It is clear that many people have missed the high point of the yield of 4.75%, and FOMO sentiment is strong, but more people believe that this round of cycles is developing towards lower yields," said John Madziyire, senior portfolio manager at asset management giant Vanguard. "Since the Fed's rate cut path is clearer than any other time this year, you can hope that the yield curve will continue to decline."

According to interest rate swap trading, after the latest CPI was announced, interest rate traders almost fully digested the expectation of a 25 basis point rate cut by the Federal Reserve at its September meeting, and almost completely digested the expectation of a rate cut in December, and the probability of a rate cut in November is also increasing. On Friday, economists at Barclays Bank adjusted their forecasts for Fed policy, expecting a second rate cut in December after announcing a rate cut in September.

Some traders are even considering the possibility of a 50 basis point rate cut in September, buying large amounts of October federal fund futures contracts. This bet only has real meaning when larger forces believe the Federal Reserve may begin its first easing cycle in years with a significant rate cut.

Beware of the "Trump trade" which may cause the difference between short-term and long-term yields of US bonds to widen.

"Weak economic data released recently and yesterday's weak CPI will make it difficult for those bearish on US Treasury bonds to dominate. But steeper trades are still worth paying attention to," said Edward Harrison of Bloomberg Strategists.

Traders are now awaiting the Fed's most favored indicators of potential inflation, the so-called core PCE price index, as well as more data showing weakness in the job market.

"Overall, we believe rates will continue to decline until they enter a loose phase," said Molly McGown, interest rate strategist at TD Securities.

Although the market has fully priced in a rate cut in September, well-known economist Mohamed El-Erian still urges caution as the upcoming US presidential election may complicate the Fed's decision-making process. Former President Trump has gained more powerful support after his televised debate with Biden, with proposals for high tariffs and anti-immigration policies, both of which are believed to exacerbate inflation rates.

In recent weeks, political factors have been an important influence on the bond market. Since the debate, the performance of short-term bonds has far outpaced that of long-term bonds, a dynamic called steepening of the yield curve, reflecting concerns in the bond market that Trump policies may lead to an increase in the premium of long-term government bond risks.

This week, with rate-cut expectations driving short-term US bond yields down much more than long-term yields, the move gained further momentum. The yield on 30-year US Treasury bonds is around 4.4%, about 29 basis points higher than the yield on 5-year bonds, and the difference between the two is close to its highest level since February this year.

"I can't say investors have a strong confidence in tenors, but steepening the US bond yield curve could still be one of the most popular trades," said Subadra Rajappa, head of US rate strategy at Societe Generale in France.