Bond traders have already priced in three rate cuts this year. Tonight's July non-farm payroll data may "ring more alarm bells" for the Federal Reserve

According to the Zhitong Finance and Economics APP, as economic data is seen as reinforcing the reasons for the Federal Reserve's three interest rate cuts this year, U.S. Treasuries rose after experiencing their best month performance so far this year. A manufacturing index combined with a surge in initial jobless claims last week further indicated that the U.S. labor market is cooling down. On Thursday, the yield on the 10-year U.S. Treasury bond fell below 4% for the first time since February, and the yield on the 2-year U.S. Treasury bond briefly dropped by 11.5 basis points to 4.14%.

On Friday, the U.S. will release more comprehensive non-farm payroll data for July, which traders and policymakers will closely monitor.

Derivatives traders expect the Federal Reserve to cut interest rates by 85 basis points this year, with expectations that there will be a 25 basis point cut at each of the remaining three policy meetings. Federal Reserve Chairman Powell announced the decision to keep rates unchanged at a press conference on Wednesday, stating that if progress in combating inflation meets expectations, a rate cut may occur at the next meeting on September 18.

Gregory Faranello, Head of U.S. Rate Trading and Strategy at AmeriVet Securities, said, "Three rate cuts do feel a bit overdone, but any weakness from here (Powell has set the stage for a big gap between now and September 18) will exacerbate the current trend."

Faranello mentioned that bets on a 50 basis point rate cut in September may increase, although Powell has not considered a rate cut. At the New York close, the pricing of derivatives contracts covering the September 18 meeting implied a 31 basis point rate cut, with a 25% probability of a 50 basis point cut.

The yield on U.S. Treasuries in July was 2.2%, the best monthly performance since December last year. After the Federal Reserve's policy statement on Wednesday and Powell's speech, the yield on U.S. Treasuries received a final boost. Overall, market participants are calling for attention to progress in reducing inflation and the risks to the labor market posed by keeping rates at their highest level in 20 years.

Subadra Rajappa, Head of U.S. Rate Strategy at Societe Generale, stated that the U.S. unemployment rate exceeded 4% for the first time since 2021 and is expected to remain at this level, but the rise in the unemployment rate "will sound many alarms."

However, ahead of the release of the July non-farm payroll report, signs of crowded positions in the U.S. bond market emerged as the market expected a large-scale easing cycle. Therefore, as bullish bets decrease, strong data could stimulate a rise in interest rates.

With the bond market returning to the situation at the beginning of this year, when the market expected the Federal Reserve to cut rates by at least six 25 basis points from the 5.25% to 5.5% level set in July last year by 2024, further rate cuts are being prepared by the Federal Reserve Following that, inflation temporarily stopped slowing down, stimulating a significant rebound in yields, pushing the yields of two-year and ten-year government bonds above 5% to around 4.75% by the end of April.

Greg Peters, Co-Chief Investment Officer of PGIM Fixed Income, stated in an interview that the 200 basis points of easing reflected in the bond market by the end of next year would be "excessively loose" for the Federal Reserve. "You need to see real momentum in the economy to achieve this goal."