US government bonds, on the heels of their best month this year, rallied on economic data seen as cementing the case for three Federal Reserve interest-rate cuts this year.

The 10-year Treasury yield fell below 4% for the first time since February on Thursday after a manufacturing gauge and jobless claims data added to evidence that the US labor market is cooling. The yield on two-year notes slid by as much as 11.5 basis points to 4.14%.

The market move precedes Friday’s release of broader US employment data for July, which will be closely watched by traders and policymakers alike.

Swaps traders priced in 85 basis points worth of easing by the Fed this year — anticipating a quarter-point reduction at each of its three remaining policy meetings. Fed Chair Jerome Powell, discussing in a news conference Wednesday the decision to hold rates steady as expected, said a rate cut “could be on the table” at the next meeting on Sept. 18 unless the economy’s performance in the meantime favors waiting.

“Three cuts does feel a bit full, but any weak data from here — with Powell setting the stage and a big gap between now and September 18th — will add to the current price action,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. Wagers on a half-point cut in September — which Powell said wasn’t being considered — would likely increase, Faranello said.

Late in the New York trading session, the swap contract that covers the Sept. 18 meeting had priced 31 basis points worth easing — or 25% odds of a half-point cut.

Treasury debt returned 2.2% in July — its best monthly performance since December — with a final boost Wednesday after the Fed’s policy statement and Powell’s comments. Broadly, those called attention to progress toward lower inflation and the risk to the labor market of keeping rates at the highest level in two decades.

The US unemployment rate, which exceeded 4% in May for the first time since 2021, is expected to remain at that level, but an increase “is going to send out a lot of alarm bells,” Subadra Rajappa, head of US rates strategy at Societe Generale, said on Bloomberg Television.

However, the Treasury market has markers of crowded positioning based on expectations of a hefty easing cycle ahead of the July employment report. Strong data could therefore spur a back-up in rates as bullish bets are trimmed.

In pressing the case for rate cuts beyond what the Fed is prepared to commit to, the bond market is going back to the playbook from the start of the year, when at least six quarter-point cuts were priced in for 2024 from the 5.25% to 5.5% level set last July.

Then inflation temporarily stopped slowing, spurring a sharp rebound in yields that pushed the two-year past 5% and the 10-year to around 4.75% in late April.

The 200 basis points of easing by the end of next year that the bond market is pricing in would be “too much Fed accommodation,” and “you need to see a real rollover in the economy for that to come to fruition,” Greg Peters, co-chief investment officer at PGIM Fixed Income, told Bloomberg Television.

–With assistance from Edward Bolingbroke.

(Updates prices, adds Sept rate cuts odds)