Record inflows to US-listed ETFs; US payrolls may catch bond markets off guard
While there are good reasons why US Treasuries should continue to rally, we think that the market may be too confident that a July Fed cut is a done deal. With the China-US trade truce announced over the weekend, it can be reasonably assumed that the urgency for a July cut has diminished somewhat. However, pricing has barely budged, with the market looking at a 100% chance of a move this month (about 80% for a 25bps cut and 20% for a 50bps cut). With the market heavily positioned on the dovish side, rates are vulnerable to a selloff if labour market data surprises on the strong side.
ADP employment (due Wednesday) and nonfarm payrolls (due Friday) were abysmal in May and consensus is looking for a bounce back into the 140-170k range. Given how volatile payrolls can be, we think that short-term USD rates may be too complacent heading into the coming few trading days. Meanwhile, 10Y US yields nudged to a new low for the year (1.96%) as global yield scarcity bites. US bonds still offer a sizable yield pickup over peers. As the European Central Bank (ECB) gears up for further easing, DM yields will likely be anchored for the foreseeable future. We see downside risks to our G3 yield forecasts.
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