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BlackRock Sees Mid-2015 Fed Rate Increase as Inflation Picks Up

The Federal Reserve may increase interest rates in the second or third quarter of next year, according to BlackRock Inc., the world’s largest money manager.

The company’s view is not far from consensus and there would need to be a big improvement in U.S. economic data to change that market view, Stephen Cohen, chief investment strategist for international fixed income, said today in London. BlackRock, the money manager for more than $4 trillion in assets, forecasts Treasury 10-year yields to rise to at least 2.70 percent by the end of the year as the economy strengthens.

“Assuming that we do get better data in the U.S., assuming that we will see a pick-up in consumer-price inflation, that will raise some questions to the Fed about how dovish the rhetoric has been,” Cohen said at a media briefing. “The initial indication of that is you see a steepening yield curve. As you move into the fourth quarter you could see more pressure on yields” to rise.

A steeper yield curve signifies higher yields for longer-maturity bonds versus shorter-dated debt.

Treasuries rose in the first half of 2014 as gross domestic product in the first quarter shrank the most in five years. The gain almost erased last year’s losses. Benchmark 10-year yields were at 2.55 percent as of 4:06 p.m. in London, after reaching 2.40 percent on May 29, the lowest since June 2013. The rate is at the bottom of its recent range, Cohen said.

Traders see about a 54 percent chance the central bank will raise its benchmark rate to at least 0.5 percent by July next year, up from 43.2 percent odds at the end of May, fed funds futures show.

Most fixed-income assets now look expensive and after a rally in euro-area peripheral government bonds spurred by a package of stimulus measures from the European Central Bank propelled yields to record lows “the majority of the recovery trade is now over” for these higher-yielding securities, Cohen said.

“For peripherals to generate significant returns going forward you have to be confident that we actually move to the next stage of significant ECB policy,” he said. This “would be something like sovereign quantitative easing, which we don’t expect in the near term,” referring to purchases of government bonds by the central bank.

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