Fed Rate-Increase Odds Drop to 10% for October, Futures Show

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  • Treasury 10-year yield rises as global stock markets advance
  • Yield on index of global bonds declines to less than 1%

The bond market shows traders see only a 10 percent chance the Federal Reserve will raise interest rates at its Oct. 27-28 meeting following weaker-than-expected employment growth.

Treasury 10-year notes ended five days of gains Monday as stocks advanced. The yield climbed from the lowest level in almost six weeks reached on Oct. 2. Mohamed A. El-Erian said the odds of a Fed liftoff are 50 percent for the following session Dec. 15-16, while analysts at Societe Generale SA said Federal Open Market Committee officials won’t move until March. 

Data showed growth in U.S. services slowed in September, as the Institute for Supply Management’s non-manufacturing index fell to 56.9 from 59 in August, below the 57.5 forecast in a survey of Bloomberg economists. The U.S. added 142,000 jobs in September, versus 201,000 that analysts predicted, a Labor Department report at the end of last week showed.

“It takes October off the table, but I don’t think it takes December off the table,” El-Erian, a Bloomberg View columnist and the chief economic adviser at Allianz SE, said in an interview with Bloomberg following the jobs report.

Benchmark Treasury 10-year note yields rose four basis points, or 0.04 percentage point, to 2.04 percent as of 12:50 p.m. New York time, according to Bloomberg Bond Trader data. The 2 percent security due in August 2025 fell 3/8, or $3.75 per $1,000 face amount, to 99 22/32.

Stocks Climb

The Stoxx Europe 600 Index of shares rose a second day while U.S. equities also gained.

The U.S. 10-yearyield dropped as low as 1.90 percent on Oct. 2, the least since Aug. 24 and approaching the lowest level since April. Treasuries returned 1 percent last week, the steepest gain in six months, based on Bloomberg World Bond Indexes.

The Treasury’s offering of $21 billion of three-month bills on Monday sold at a zero percent yield for the first time, with bidding rising to the highest level since June.

Boston Fed President Eric Rosengren said Oct. 3 the U.S. economy needs to be growing at a 2 percent pace in the second half of the year to justify an interest-rate increase by December.

“The bias remains for lower yields, while waiting for the next pieces of relevant macro data,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. The comments from Rosengren “contain no clear signal for 2015 liftoff, either. I’d say the October FOMC is no longer a ‘live meeting.’”

The yield on the Bloomberg Global Developed Sovereign Bond Index fell below 1 percent last week to 0.97 percent, the lowest level since April.

Markets are now pricing in the Fed to raise rates in March with two increases in each of the next two years, according to SocGen strategists, led by Vincent Chaigneau, London-based head of fixed-income and currency strategy.

Fed Outlook

The odds of a Fed rate increase were about 37 percent for the December meeting, 45 percent at or before the January session and 59 percent at or before the March meeting, according to futures data compiled by Bloomberg. The odds for a boost by the October meeting were 18 percent on Oct. 1. The calculations are based on the assumption that the effective fed funds rate will average 0.375 percent after liftoff, versus the current target range of zero to 0.25 percent.

The Fed will probably still raise interest rates in 2015, according to Greg Fleming, president of Morgan Stanley’s wealth-management unit.

“If the Fed focuses on the U.S. economy and what’s happening here, and isn’t benchmarking the next rate rise to what happens outside the U.S. and the headwinds around the world, they will move before the end of the year,” Fleming said Monday in an interview on CBNC.

The central bank needs to amend the way traders view the path for interest rates, El-Erian said.

“The critical issue for the Fed is not when it moves first;it is the journey,” El-Erian said. Between now and December, it has to get the market to realize “that this will be the loosest tightening in the modern history of central banks,” El-Erian said.

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