• Bond-market strategists revisit Fed models after decision
  • Treasuries "a buy either way," says Scotia's Haselmann

Neil Bouhan at BMO Capital Markets expected the Federal Reserve to raise interest rates this week. Now he’s questioning all his views on the central bank.

He’s not the only one. Strategists and traders across Wall Street are re-examining their approach to predicting the Fed’s moves after officials kept their target near zero Thursday and released an unexpectedly dovish policy statement. Fed Chair Janet Yellen cited a range of concerns -- from slowing growth in China to global market volatility -- to explain the decision to hold the benchmark overnight rate at historic lows.

The tone of her comments in a press conference after the announcement surprised the bond market, fueling the biggest rally in two-year Treasuries since March 2009, when the Fed said it was expanding its bond-buying program. It also left many prognosticators struggling to pinpoint how to trade in the lead-up to the next policy meeting less than six weeks away.

"There is really no way to look at this market if you can’t handicap Fed policy, and they’ve made that much more difficult," said Bouhan, a Chicago-based strategist at BMO. He doesn’t expect the central bank will raise interest rates until 2016.

That’s in line with the futures market. Traders see a 46 percent chance of a rate increase before December, down from 64 percent on Sept. 16, according to calculations that assume the fed funds rate will average 0.375 percent after the first increase.

Diminished prospects of a rate boost benefit the bond bulls.

The benchmark 10-year Treasury yield fell five basis points for the week, or 0.05 percentage point, to 2.13 percent. The 2 percent security due in August 2025 rose about 1/2, or $5 per $1,000 face amount, to 98 25/32.

Lesson Learned

“What we learned from yesterday is that Treasuries are a buy either way," Guy Haselmann, head of capital market strategy with Scotiabank, wrote in a note to clients Friday.

Stocks fell after the Fed’s decision. The S&P 500 Index lost 1.6 percent Friday. Rick Rieder, chief investment officer for fixed income at BlackRock Inc., said a Fed rate increase may help stabilize global markets.

“There’s a window for the Fed to move," he said during a roundtable at the New York offices of the world’s largest money manager on Friday. “Markets are clamoring for certainty,” which “would ease markets a lot more than keeping rates at zero for an extended period of time."

John Briggs, head of strategy for the Americas at RBS Securities Inc., echoed the plea for more clarity. He compiled a list of 10 broad economic concerns that Yellen cited in the press conference, including energy prices, U.S. financial conditions and weaknesses in emerging markets.

"It’s not common for the Fed to name all these things," he said from the firm’s Stamford, Connecticut, office. "Where do they rank? Now we don’t even know what to look at to determine whether they will raise rates or not."

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