Traders Look to US Jobs Data to Support the Rally in Treasuries

Investors who’ve positioned for more gains in US Treasuries will look to revised data on the US labor market for signs the Federal Reserve needs to start aggressively slashing interest rates.

A Bloomberg gauge of Treasuries surged 1.7% this month as investors bet the US central bank will lower rates by as much as one point this year, with a first move likely in September. The yield on policy-sensitive two-year notes fell more than 25 basis points to trade just below 4%.

That tees up revisions of jobs data on Wednesday, which economists expect to show less-resilient growth earlier this year. The US labor market has come into sharp focus as the central bank gets closer to the start of its easing cycle, with a report in July setting off a sharp rally in the Treasuries market.

The data “could show a US jobs market far less strong than was initially thought,” said Chris Turner, global head of FX strategy at ING. Combined with the Fed meeting minutes due later on Wednesday, “the case should build for lower Fed rates and a weaker dollar.”

Economists surveyed by Bloomberg expect the revisions on Wednesday to show at least 600,000 fewer jobs were added than currently estimated in the year through March. Goldman Sachs Group Inc. indicates the number could be as large as a million.

Read more: Fed Confronts Up to a Million US Jobs Vanishing in Revision

“It will likely show that the payroll picture was less resilient than previously thought,” said Mohit Kumar, chief economist for Europe at Jefferies International. “But the market impact might be limited because it’s backward looking and doesn’t change the macro view.”

Traders will also scour minutes from the Fed’s July policy meeting, at which the central bank held interest rates steady. Any clues on the path ahead for rates will be in focus, as well as any guidance on when the Fed will complete its current course of quantitative tightening.

Bond traders have been taking on a record amount of risk as they bet on a Treasury market rally tied to the Fed’s rate cuts. The number of leveraged positions in US government bond futures has risen to an all-time high ahead of the annual economic symposium in Jackson Hole, Wyoming, which will commence on Thursday.

Investors have also been positioning for a weaker dollar, turning the most bearish on the greenback since 2020. The Bloomberg Dollar Spot Index is down almost 2% this month.

“Some clients have argued recently that any downside surprises from today’s revisions would strengthen the case for aggressive, front-loaded Fed rate cuts,” said Valentin Marinov, head of G-10 FX strategy at Credit Agricole. But “a lot of Fed-related negatives seem to be in the price of the dollar.”