Key Facts
• On August 4, short-term U.S. Treasury yields rose after a decline.
• A $125 billion auction of 3-, 10-, and 30-year bonds is scheduled this week.
• The auction size is the largest since May, potentially pressuring bond prices.
• On August 1, weak employment data led to the largest bond rally of 2025.
• Morgan Stanley strategists recommend long positions in 5-year bonds.
• 5-year bond yields dropped 22 basis points on August 1, the largest decline in a year.
• Federal Reserve rate cut probability for September is 85%, up from 40% pre-data.
• ING strategists suggest inflation from tariffs may push the Fed toward a rate cut.
• A steeper yield curve is possible if rate cut expectations strengthen.
Summary
The U.S. Treasury market is bracing for a $125 billion bond auction this week, the largest since May, which could exert downward pressure on bond prices. On August 1, weak employment data triggered the year’s biggest bond rally, with 5-year yields dropping 22 basis points. Morgan Stanley strategists recommend maintaining long positions in 5-year bonds, while ING strategists highlight potential inflation from tariffs and a likely Federal Reserve rate cut in September. The probability of a 0.25-point rate cut has risen to 85%, reflecting market sentiment. A steeper yield curve may emerge if expectations for monetary easing grow.
