Interest rate cuts are expected to be full! Is the US debt rising too fast? We'll see what happens on Friday.

As the US ISM manufacturing index continued to shrink less than expected in August, recession fears rose again, traders' interest rate cuts were expected to be full, and US debt rose sharply.

On Tuesday, the yield of US bonds plummeted across the board. The yield of 2-year US bonds dropped by 7 basis points, and the 2-year US bonds have risen for four consecutive months, setting a record for the longest consecutive increase since 2021. Since the end of April, driven by the expected interest rate cut, the overall rate of return on US debt has exceeded 6%.

For bond bulls, if the labor market is still resilient, it will suppress the expectation of the Fed to cut interest rates sharply, which makes the non-farm payrolls report to be released on Friday a key issue.

Ed Al-Hussainy, interest rate strategist at Columbia Thread Needle Investments, said:

"If you missed the rally, it would be a bit dangerous to chase it up now."

"The problem we are facing now is that the job market may stabilize or deteriorate rapidly. This is the focus of debate in the second half of this year. "

At present, economists generally expect that the number of non-farm employees in the United States will increase from 114,000 last month to 165,000, and the unemployment rate will drop by 0.1 percentage point from 4.3% to 4.2%, indicating that the labor market has picked up.

It is worth noting that in the August ISM manufacturing sub-index released overnight, the employment index has obviously picked up. According to the analysis, this may indicate that the non-farm payrolls report this Friday will be stronger than expected.

Traders now expect that the Fed will cut interest rates by 100 basis points during the year, which means that at least one of the remaining three FOMC meetings in 2024 will cut interest rates by 50 basis points.

However, at present, the relevant data of the job market are "mixed", and the latest data reported by the World Federation of Large Enterprises shows that the number of jobs is not "sufficient", while the number of people applying for unemployment benefits for the first time every week has remained stable in the past few months.

Therefore, some views tend to weaken the bond rally. Deutsche Bank strategist said in a customer report:

"In view of the fact that NBER (National Bureau of Economic Research) seems unlikely to declare an economic recession in the next 3-4 months, it is hard to see that a rate cut of more than 200 basis points is reasonable by looking at the data calmly."

"The economic development is relatively slow. Only when the market falls rapidly can there be a reason to cut interest rates significantly as expected."

In addition, the issuance of corporate bonds tends to increase after summer, so the bond yield will show a seasonal upward trend in September, which increases the supply pressure on the market.

Historical data also shows that September is the worst month for bond investors in the past decade-the yield of 10-year US bonds has risen eight times in the past decade, with an average increase of 18 basis points.

Risk warning and exemption clause

The market is risky and investment needs to be cautious. This paper does not constitute personal investment advice, nor does it take into account the special investment objectives, financial situation or needs of individual users. Users should consider whether any opinions, viewpoints or conclusions in this article are in line with their specific situation. Invest accordingly at your own risk.