Bond Market Rallies As Recession Worries Mount, Rate Cut Bets Gain Steam Ahead Of Jobs Data

Zinger Key Points
  • Long-dated Treasuries rally on weak data, signaling potential trend reversal.
  • September Fed rate cut bets surge to 65% after string of disappointing economic reports.

Long-dated U.S. Treasuries are rallying, breaking above a key downtrend that began in late 2023, fueled by recent soft economic data, which has led investors to reprice higher expectations on the Federal Reserve cutting interest rates in September.

The iShares 20+ Year Treasury Bond ETF TLT, a popular gauge for long-term bond performance, has climbed to $92 on Tuesday, eyeing its fourth consecutive day of gains.

This recent spike has lifted TLT above its declining trend channel for 2024 and, crucially, above its 50-day moving average. These technical indicators suggest a potential trend reversal is underway.

Other ETFs that track long-term zero-coupon Treasuries, such as the Pimco 25 Year Zero Coupon U.S. Treasury Index ETF ZROZ, have seen even higher increases in recent sessions, surging as much as 6% over the last four days.

Chart: TLT ETF Rallies Above 50-Day Average, Snaps Bearish 2024 Trend

Weak Economic Data Fuels Bets On Fed Rate Cut in September

Recent economic data releases have fallen short of expectations, reigniting speculation that the Federal Reserve may start cutting interest rates as early as September.

Last week, the second estimate for U.S. GDP growth in the first quarter delivered a downward revision from 1.6% to 1.3%. Additionally, the Chicago PMI business activity index showed its worst reading since May 2020.

On Monday, the ISM Manufacturing PMI for May extended the contractionary trend seen in April, also missing expectations.

Tuesday brought news that the number of job openings in April 2024 dropped by 296,000 compared to the previous month, reaching the lowest level since February 2021 and falling short of expectations of 8.34 million.

These disappointing data points have led traders to significantly increase their bets on a Fed rate cut in September. According to CME Group’s FedWatch tool, the market now assigns a 65% chance of a rate cut, up from 46% just a week ago.

All Eyes On This Week’s Jobs Data

The upcoming days will witness crucial updates on the U.S. labor market, with a series of data releases that will significantly impact financial markets.

On Wednesday, the ADP will release its private Employment Report, followed by the highly anticipated official employment report from the Bureau of Labor Statistics on Friday.

Economist consensus data compiled by Econoday predicts a rise in nonfarm payrolls from 175,000 in April to 195,000 in May. The estimates range from a low of 151,000 to a high of 225,000.

The unemployment rate is expected to remain unchanged at 3.9%. Average hourly earnings are forecast to show a slight monthly increase, rising from 0.2% to 0.3%. The annual growth rate is predicted to hold steady at 3.9%.

MeasureApril 2024May 2024
Consensus range
Nonfarm payrolls (M/M)175,000195,000151,000 to 225,000
Unemployment rate3.9%3.9%3.8 % to 3.9%
Average hourly earnings (M/M)0.2%0.3%0.2% to 0.3%
Average hourly earnings (Y/Y)3.9%3.9%3.8% to 3.9%
Data: Econoday

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