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(Bloomberg) — Bond bulls are poised for their first major test of 2023.

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Treasuries rose this month on widespread expectations that the Federal Reserve is nearing the end of its rate hikes as inflation eases and fiscal tightening cools the economy. Traders will find out if that is the case in the coming week as the central bank announces its latest decision and the monthly labor market report is released.

Investors have returned to bonds driven by high yields amid expectations that the economic slowdown will prompt the Fed to end its hikes and then ease monetary policy later this year. Benchmark 5- and 10-year yields fell about 40 basis points in January as money managers and pension funds continued to shift funds from stocks to long-term bonds.

“Asset managers came into the year with large cash balances and there is a bit of a ‘get in now before it’s too late’ sentiment,” said Alexandra Wilson-Elizondo, head of retail multi-asset investing at Goldman Sachs Asset Management. Investors see signs of a global slowdown, some weaker data and “if history is a guide, it shows that the turning points could be sharp.”

That bullish sentiment was underscored this week as investors bought much bigger chunks of new Treasury debt sales than is typically seen, locking yields that remain near the higher end of a range seen over the past 15 years. At current levels, Treasuries are seen as an attractive hedge against the downside. Signs of such a slowdown are mounting as companies such as Intel Corp. brace for a weaker outlook and consumers tighten.

That macroeconomic outlook is expected to keep benchmark yields in a marginal range, supported by the twin forces of easing price pressures and rising employment. On cue, swaps traders are pricing in the Fed raising its benchmark interest rate, now in the range of 4.25% to 4.5%, by a quarter percentage point on Wednesday, followed by another such move this year.

On Friday, the Fed’s preferred measure of inflation eased to its slowest annual pace in a year. Economists polled by Bloomberg on Feb. 3 expect the Labor Department to report that wage growth slowed to 190,000 in January from 223,000 in December.

Other key data releases include the employment value index and job opening numbers, as well as employment and price measures from the ISM surveys of manufacturing and services activity.

The big numbers leave the Treasury market at risk of a reversal if Fed Chairman Jerome Powell pulls back on traders’ expectations. At the Fed’s December meeting, officials indicated that policy would remain high through 2023 at a peak rate of 5.1%, with no rate cut expected, a tighter outlook than markets are now pricing in.

“There is tension between the market and Fed policy assessments, and that may take some time to resolve over the next three to six months,” said Goldman’s Wilson-Elizondo. “The enthusiasm for buying Treasuries is likely to continue” as long as “inflation doesn’t look stickier” and the flexibility of the labor market has people thinking that “the Fed may need restrictive policy to crack the labor market.”

What to watch?

  • Economic calendar

    • January 30: Dallas Fed manufacturing index

    • January 31: Employment Cost Index; FHFA Home Price Index; S&P CoreLogic CS Home Price Indices; MNI Chicago PMI; Conference Board consumer confidence; Dallas Fed services activities

    • February 1: MBA mortgage applications; ADP employment change; construction costs; S&P Global US Manufacturing PMI; ISM production; job openings

    • February 2: claims of the unemployed. factory orders

    • February 3: US employment report; S&P Global US Services PMI; ISM services

  • Fed calendar

  • Auction calendar.

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