Citi, National Australia Cut U.S. Rate, Yield Forecasts on Europe's Crisis

Citigroup Global Markets said Europe’s debt crisis will keep the Federal Reserve from raising interest rates this year, while National Australia Bank Ltd. cut its forecast for U.S. 10-year yields.

“We revise our call on the first Fed rate hike to the first half of 2011,” Citigroup, one of the 18 primary dealers that trade directly with the Fed, said in a report it distributed yesterday. Europe’s debt crisis has led to “the threat of renewed financial instability and heightened risk aversion,” the report said.

National Australia, the country’s largest lender, reduced its year-end prediction for 10-year yields to 4 percent from 4.25 percent, said Peter Jolly, head of market research for the investment-banking unit. The benchmark 10-year note rate was 3.46 percent as of 1:57 p.m. in Tokyo, Bloomberg data show.

Traders reversed bets the Fed will raise rates this year after the European Union unveiled an almost $1 trillion loan package on May 10 to halt a slide in the euro and bring down Greek bond yields. Citigroup and NAB join Morgan Stanley and Wrightson ICAP, which revised forecasts this month and said the U.S. central bank will keep interest rates near zero.

“While recovery is becoming entrenched, policy makers need to be certain that financial stability has been secured,” Citi said in its report dated May 14 and written by analysts including Robert DiClemente, the bank’s chief U.S. economist in New York.

Low inflation is allowing the Fed to keep its target for overnight bank lending near zero, National Australia’s Jolly said.

‘Europe’s Troubles’

“Europe’s troubles will delay the ultimate rise in yields that we expect,” Sydney-based Jolly said. “Inflation pressures are very modest and still declining. That will put a lid on bond yields.”

The 10-year rate will climb to 4.02 percent by Dec. 31, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings. The forecast was 4.12 percent a week ago.

The euro fell toward its lowest level in four years even as European finance ministers sought to assuage concern spending cuts to combat the debt crisis will cause the region to fall back into recession.

Inflation Slowing

U.S. consumer prices excluding food and energy costs probably rose 1 percent in April from a year earlier, according to a Bloomberg News survey of economists before the Labor Department reports the figure tomorrow. That would be the least since 1966.

Morgan Stanley, another primary dealer based in New York, cut its forecast for rates in a note to clients last week. It reduced its year-end 10-year note yield prediction to 4.5 percent from 5.5 percent.

Wrightson, a Jersey City, New Jersey-based unit of ICAP that specializes in U.S. government finance research, pushed back its call for a Fed increase to the first half of 2011 from November.

Futures on the CME Group Inc. exchange show a 37.9 percent likelihood U.S. policy makers will raise their benchmark rate by at least a quarter percentage point this year, dropping from 57.8 percent a month ago.

The Fed has kept the rate in a range of zero to 0.25 percent since December 2008.

To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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