Bond traders are betting on the Federal Reserve making a "bold move" by cutting interest rates by 50 basis points, becoming a popular expectation

According to the Zhitong Finance and Economics APP, as the market's discussion on whether the Federal Reserve can achieve a soft landing intensifies, bond traders generally expect the Fed to start a rate-cutting cycle this week, with the rate cut potentially reaching half a percentage point.

Market data on Tuesday showed that the probability of policymakers announcing a 50 basis point rate cut is about 55%. This expectation was formed after the unexpected rise in retail sales data in August, which indicated a recovery in US consumer spending, increasing uncertainty in the financial markets. This uncertainty will persist until the Fed announces its policy decision for September on Wednesday.

Brianna Ulrich, Chief US Economist at Puxin Bank, said in an interview, "This decision is essentially a coin toss. It is possible to cut rates by 50 basis points tomorrow." She predicted that the Fed's economic forecast summary may show a dot plot of a total rate cut of 100 basis points for the year.

Despite this, traders have not reached a consensus on the magnitude of the Fed's rate hike in September. For months, the financial markets have been debating the magnitude of the Fed's first rate cut in four years, with economic reports and Fed officials' speeches intensifying the debate. Traders have fully priced in the expectation of a quarter-point rate cut, but with increasing speculation about the Fed's decision, they have started betting on a larger rate cut, namely 50 basis points.

The impact of rate cut expectations has already been seen in the US Treasury market. The Bloomberg Index shows that US Treasury yields are expected to decline for the fifth consecutive month, marking the best monthly performance since 2010. The decline in US Treasury yields has led to yields on almost all maturities except the 20-year bond falling below 4% on Tuesday.

At 1 pm local time, demand for the $13 billion 20-year bond auction was weak. The auction results showed a yield of 4.039%, two basis points higher than the yield at the bid deadline, indicating a lower yield than expected. Subsequently, long-term bond yields hit new highs.

Earlier on Tuesday, US retail sales unexpectedly rose in August, driven mainly by online shopping, overshadowing fluctuations in other retailers' performance. At the same time, industrial production in August also exceeded expectations.

These data have put pressure on the US Treasury market. In early afternoon trading in New York, the two-year Treasury yield rose by 4 basis points to 3.60%, while the ten-year Treasury yield rose by 3 basis points to 3.65%. The US dollar also rose against most G10 currencies.

Bloomberg strategist Simon White commented, "Overall, retail sales in August exceeded expectations, consistent with strong leading data, but inconsistent with the market's expectation that the Fed is more likely to cut rates by 50 basis points this week."

Despite this, the derivatives market expects that the November meeting will adopt a loose policy of about 76 basis points, which means that interest rates will be cut by 50 basis points in the next two meetings.

Over the next 12 months, traders have already factored in expectations of a 243 basis point rate cut. If this rate cut pace is realized, it will bring the Fed's policy rate down to around 3%.

Ashok Bhatia, Deputy Co-Chief Investment Officer at Neuberger Berman Group, stated: "The rise in yields is justified as the market has already priced in a significant amount of loose policy." He added: "Based on what we currently know, it will be challenging for the Fed to achieve all of these objectives."

Overall, the market is filled with uncertainty regarding the Fed's rate cut expectations and decisions, while economic data fluctuations and officials' speeches will continue to influence traders' expectations and bets. The Fed's policy decision will be announced later this week, at which point the market will react to this crucial decision