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Bond traders eye G-20 meeting as Treasuries continue to rally

New York

THE longest weekly rally in Treasuries since 2012 may find another gear as bond traders turn their focus to Osaka, where world leaders are meeting for a pivotal Group of 20 meeting.

Yields on 10-year Treasuries broke below 2 per cent for the first time since 2016 last week after the Federal Reserve signalled that it is ready to lower borrowing costs, prompting a flurry of bets that a rate cut will happen in July. Ahead of the G-20 meeting, strategists at NatWest Markets, Bank of America Corp and elsewhere see little standing in the way of even lower yields.

The US-China trade dispute remains hot. On Friday, the US Commerce Department barred five more Chinese entities from buying American-made products. Combined with tepid inflation and accumulating downside risks to US growth, that means this is a dangerous time to bet against Treasuries, according to John Briggs, head of Americas strategy at NatWest.

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"I would fade fixed income at your own risk right now," he said. "I think the odds are low that China and the US come to an actual agreement, or a 'we made a lot of progress and expect a deal very soon'."

Benchmark 10-year Treasury notes completed their seventh straight weekly rally on Friday. The yield has shrunk to 2.05 per cent from 2.53 per cent on May 3. Two-year notes are at 1.77 per cent. NatWest expects Fed rate cuts in July and September to help push those yields down to 1.85 per cent and 1.5 per cent, respectively, by year-end.

Both Mr Briggs and Bank of America's Mark Cabana acknowledged that a better-than-expected outcome at this week's summit - namely, a delay of further US tariffs - could drive 10-year yields roughly 10 basis points higher in the short-term. However, lower yields are "the path of least resistance" in Mr Cabana's eyes.

"The real question is: what gets the Fed to not cut in July? I think you need more than positive vibes out of the G-20," said Mr Cabana, head of US interest rate strategy. "The Fed has shifted into downside risk-management mode."

Bank of America is pencilling in 75 basis points worth of cuts in the upcoming easing cycle, with the Fed's first move in September - though the "risks are skewed" towards an earlier cut in July, Mr Cabana said.

Not everyone is convinced. The post-Fed rally in US bonds as well as bets on a more than 25 basis points July cut do not make sense given the current state of the economy, according to Vanguard Group Inc strategist Anne Mathias.

"It's almost like the market is forcing the Fed to act, and that's just a very weird environment," she said during a panel at the Fixed Income Leaders Summit in Philadelphia last week. "I don't think the Fed is going to respond to being forced."

While Mr Cabana thought that G-20 developments will be the most important market driver "by far" this week, he is also keeping an eye on auctions. The US Treasury is scheduled to sell a combined US$131 billion worth of two-, five- and seven-year securities in the days ahead. BLOOMBERG