Bond Mkt Calling Yellen’s March Rate Hike Bluff
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.