- Shimomura says ``the game has shifted'' for the U.S. Fed
- Bridgewater's Ray Dalio predicts ``major easing via QE''
Treasuries rose for the first time in three days on speculation a stock-market rout will lead the Federal Reserve to delay raising interest rates.
Mitsubishi UFJ Kokusai Asset Management joined Ray Dalio, the billionaire founder of Bridgewater Associates, in predicting the Fed will revive its bond-purchase program known as quantitative easing. As shares and commodities plunged in August, investors scaled back forecasts for a Fed rate increase, and the futures market suggests the odds of a move this year have fallen to about 50 percent.
“The game has shifted,” said Hideo Shimomura, the chief fund investor in Tokyo at Mitsubishi UFJ Kokusai Asset, which manages $100 billion. “It will be quite difficult to raise rates. There’s a high probability that they will not hike rates. They may even return to quantitative easing next year.”
The benchmark U.S. 10-year note yield declined two basis points, or 0.02 percentage point, to 2.16 percent as of 7:07 a.m. in New York, according to Bloomberg Bond Trader data.The 2 percent security due in August 2025 rose 5/32, or $1.56 per $1,000 face amount, to 98 18/32.
Treasuries pared their advance on Thursday as people familiar with the matter said China had cut its holdings of U.S. Treasuries this month to raise dollars needed to support the yuan in the wake of a shock devaluation two weeks ago. China has communicated with U.S. authorities about the sales, said another person. They didn’t reveal the size of the disposals.
“There is talk about certain central banks, including the Chinese, selling developed-market bonds and that being the reason for upward pressure on yields, although I am always bit cautious of drawing that strong conclusions as other forces are more important, mainly interest-rate expectations,” said Martin van Vliet, a senior interest-rate strategist at ING Groep NV in Amsterdam. “Even if the Chinese were to continue selling I think monetary-policy expectations are much more important in this respect. Maybe on the margin it puts upward pressure on Treasury yields.”
Dalio said he expects the Fed to resume QE even if it first increases benchmark rates by a fraction of a percent.
“We don’t consider a 25-50 basis point tightening to be a big tightening,” Dalio wrote in a LinkedIn post updated Tuesday. While the Fed may implement a small increase, “we doubt that we will see anything much larger before we see a major easing via QE.”
The Fed used quantitative easing-- the process of buying bonds to flood the economy with money and put downward pressure on benchmark borrowing costs -- from 2008 through last year to support the U.S. economy.
The MSCI All Country World Index of shares has slumped more than 8 percent from this month’s high set Aug. 5. The Bloomberg Commodity Index extended its decline Wednesday to the lowest level since 1999.
While the Fed ended its bond purchases, it has kept its benchmark interest rate close to zero since 2008 to help strengthen the economy.
The odds of an increase by the central bank’s December meeting have fallen from 70 percent at the end of July, futures contracts show. The figures are based on the assumption that the benchmark will average 0.375 percent after the first increase.
The Treasury is scheduled to sell $29 billion of seven-year securities on Thursday. The notes due to be sold yielded 1.90 percent in pre-auction trading, compared with 2.021 percent at a previous auction on July 30.