The bond market is saying China’s decision to devalue the yuan won’t stop the Federal Reserve from raising interest rates.
Futures contracts indicate traders see a 48 percent chance the U.S. central bank will increase official borrowing costs at policy makers’ Sept. 16-17 meeting, up from 40 percent on Aug. 11, when China unexpectedly devalued its currency. At the same time, economists at the world’s biggest bond shops are paring bets on how quickly Treasury yields will rise amid global growth concerns as a bond-market inflation gauge fell to the lowest in more than six years.
“The post-liftoff pace is increasingly moving into focus, but September still matters a lot, particularly with markets still not fully prepared for it,” said Michael Leister, a senior rates strategist at Commerzbank AG in Frankfurt. “Our economists still expect a September lift-off, with markets about 50-50, hence there is room for Treasury yields to rise and the curve to flatten.”
Treasury two-year note yields, which are closely tied to expectations regarding a Fed rate increase, rose one basis point, or 0.01 percentage point, to 0.72 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 0.625 percent note due in July 2017 fell 1/32, or 31 cents per $1,000 face amount, to 99 26/32.
Treasury 30-year bond yields, which are more influenced by the longer-term outlook for growth and inflation, fell one basis point to 2.84 percent.
Even though traders expect the Fed to raise rates, they are still bullish on two-year notes amid concern the global economic picture will limit the increase.
Hedge-fund managers and other large speculators increased bets two-year notes will rise by the most since March in the week ending Aug. 11, according to U.S. Commodity Futures Trading Commission data released today.
Traders increased their net-long positions to 162,874 contracts, from 98,261 contracts the previous week on the Chicago Board of Trade. The increase of 64,613 contracts was the most since March 27.
Traders are also skeptical on inflation. The one-year break-even rate, a bond-market inflation gauge, fell to the lowest on a closing basis since May 2009.
Other signs pointed to economic improvement. A report showed factory production rose more than forecast in July as automobile assembly jumped to the highest since 1978.
“The data was stronger than expected,” said Shyam Rajan, head of U.S. rates strategy at Bank of America Corp.in New York, one of the 22 primary dealers that trade with the Fed. “On the margin, some of the nervousness about the September hike around the China devaluation seems to be declining.”
An earlier Labor Department report showed wholesale prices in the U.S. climbed at a slower pace in July, a possible sign of things to come as energy prices plunge.