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Traders Lock In Fed Bets, Boosting Treasuries for Fourth Week

(Bloomberg) -- Treasuries were set to extend their rally into a fourth week after Thursday’s jobless claims data cemented expectations the Federal Reserve will cut interest rates next week.

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The yield on US 10-year debt edged two basis point higher to 4.04% after falling to a five-month low Thursday, but still remained on course for a fourth week of declines, the longest streak since February. The more rate-sensitive two-year rate edged up to 3.55%.

With a quarter-point rate cut next week fully priced in, focus now shifts to the pace of easing for the rest of the year. US President Donald Trump has been vocal about his preference for much lower interest rates, but until yesterday, traders were more cautious. Now money markets are assigning an 80% chance of two further cuts by year-end.

“Given the weakness of the jobs market, we believe the Fed will feel obliged to act with or without political pressure,” Vincent Mortier, chief investment officer at Amundi SA, said on Bloomberg TV. “We are still expecting three cuts this year.”

Amundi is positioned for the Treasury yield curve to steepen, led by the short-end. Others are more cautious, with Allianz and Pimco saying they used the recent rally to pare back some curve risk.

This week’s jobless claims numbers eclipsed the August inflation numbers, which at 2.9% matched economists’ estimates. The Fed’s preferred gauge is expected to maintain a similar 2.9% pace when the August figures are published at the end of the month.

--With assistance from Alice Gledhill.