By Alice Gledhill

(Bloomberg) -- US short-dated bonds yields are near their lowest level in more than three months, reflecting conviction among traders that the Federal Reserve will cut interest rates next month.

The two-year yield, among the most sensitive to changes in monetary policy, was trading around 3.67% on Thursday. It has slumped nearly 30 basis points since the end of July, with much of the move following weaker-than-expected payrolls data.

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The gains have been underpinned by expectations that Fed officials will lower borrowing costs for the first time this year at their September meeting — a move that President Donald Trump has repeatedly demanded.

A fresh spate of economic data later Thursday, including producer prices and initial jobless claims, will offer further evidence on the health of the US economy.

The 10-year yield has fallen to around 4.22%, 15 basis points lower than late July. It was modestly lower on Thursday.

Market sentiment has shifted dramatically from two weeks ago, when expectations for a September cut were less than 50%. That started to change in the aftermath of a weak payrolls report, which intensified Trump’s campaign to force the Fed to bring borrowing costs down.

Treasury Secretary Scott Bessent added to that call on Wednesday, suggesting that a 50 basis point move in December could be appropriate. He added that rates “should probably be 150, 175 basis points lower.”

“One of the strategies they are doing is to shift the window to what is acceptable,” Henry Allen, macro strategist for Deutsche Bank AG, said in an interview with Bloomberg TV. In contrast to the large moves that Bessent and Trump are calling for, “suddenly a 25 basis point rate cut seems fairly modest and achievable.”

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