Bond Mkt Call­ing Yellen’s March Rate Hike Bluff

The Economic Times - - Money -

Mum­bai: Bond traders are call­ing the Fed­eral Reserve’s bluff. For weeks now, ev­ery­one from Janet Yellen to Fed new­comer Pa­trick Harker has been try­ing to jaw­bone in­vestors into be­liev­ing an in­ter­est-rate in­crease in March is on the ta­ble. That the meet­ing is “live.”

Yet try as they might, the bond mar­ket seems un­con­vinced there’s much be­hind the tough talk. With less than three weeks to go, traders see slightly more than a one-in-three chance the cen­tral bank raises rates. That’s well short of the 50% min­i­mum that has pred­i­cated every rate hike in the past quar­ter-cen­tury, ac­cord­ing to data com­piled by Bianco Re­search.

Rea­sons for the skep­ti­cism are var­ied, but the one that stands out is the sim­ple fact that Fed of­fi­cials are run­ning out of time to make their case. The Fe­bru­ary jobs re­port comes five days be­fore Fed of­fi­cials gather and in­fla­tion data will be re­leased mere hours be­fore their de­ci­sion is an­nounced. Both key met­rics come out dur­ing the Fed’s pub­lic black­out pe­riod, which starts on March 4, leav­ing traders in the dark about the cen­tral bank’s in­ten­tions.

“The mar­ket rec­og­nizes it has a veto over the Fed,” said Jim Bianco, a three-decade in­dus­try veteran whose re­search is fol­lowed by some of the big­gest fixed­in­come man­agers. Be­cause of the tim­ing of the re­leases and the risk of whip­saw­ing the mar­ket, “it might be too late at that point for themtodoany­thing,evenif weget eye-pop­ping num­bers.”

U.S. Trea­sury yields have fallen this year as wor­ries over faster in­fla­tion and big­ger deficits un­der a Trump ad­min­is­tra­tion give way to a more tan­gi­ble de­bate over the Fed’s in­ter­est-rate pol­icy and jit­ters about the up­com­ing French elec­tion. The bench­mark 10-year note has slid to 2.33 per­cent, down from 2.64 per­cent in mid-De­cem­ber.

Right now, the odds are de­cid­edly against an in­crease in March. Fu­tures traders are pric­ing in just a 40 per­cent prob­a­bil­ity, based on the as­sump­tion that the ef­fec­tive fed funds rate will trade at the mid­dle of the new FOMC tar­get range af­ter the next hike. The last two times the Fed raised rates, in De­cem­ber 2015 and De­cem­ber 2016, the chances were 74 per­cent and 100 per­cent.

Just one of the 23 bond deal­ers that trade with Fed is call­ing for higher rates next month. And Jef­feries LLC says it’s re­ally a toss-up be­tween March and June, given the del­uge of data com­ing in just be­fore the de­ci­sion. “The Fed wants the mar­ket to be­lieve March is live, but I don’t nec­es­sar­ily think that means they will tighten then,” said Clay­ton Tri­ick, money man­ager at An­gel Oak Cap­i­tal Ad­vi­sors, which over­sees $5.5 bil­lion.

Fed of­fi­cials said in min­utes of their lat­est meet­ing that they can raise rates “fairly soon” if la­bor mar­ket and in­fla­tion data meet or ex­ceed cur­rent ex­pec­ta­tions. But time and again, of­fi­cials have shown that they want to be sure in­vestors are ready for an in­crease be­fore it ac­tu­ally hap­pens.

“We cer­tainly never want to sur­prise the mar­kets,” Cleve­land Fed Pres­i­dent Loretta Mester told Bloomberg TV last week. Since they be­gan an­nounc­ing their tar­get for the Fed funds rate in 1994, a pe­riod en­com­pass­ing 191 meet­ings, pol­i­cy­mak­ers have never sur­prised traders by lift­ing rates when they were ex­pect­ing it to stay put, Bianco said.

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