Buy Bonds Is Signal From Atlanta Fed Model Showing Cooling GDP

  • Fed bank's model signals Q3 economic growth rate of 0.8%
  • Consensus Wall Street forecast is for expansion of 1.5%

Treasury bulls, take heart: Even as U.S. central bankers debate this week whether to raise interest rates for the first time since 2006, a model developed by a regional Federal Reserve bank says the economy is losing steam.

The forecasting tool, created by the Atlanta Fed and called GDPNow, has been prescient this year in estimating gross domestic product and signaling a path for 10-year yields. It was more accurate than Wall Street in predicting preliminary growth in the first and second quarter, and it’s suggesting most analysts may be too optimistic on the economy before the Oct. 29 release of data for July through September.

The Atlanta Fed’s gauge indicates a 0.8 percent annual growth rate in the third quarter, compared with the 1.5 percent median estimate in a Bloomberg survey of economists. Should the Fed model prove accurate, traders may push out bets on when the central bank will lift its benchmark rate from near zero and question the consensus that yields are poised to rise. Dimmer prospects for Fed tightening have helped cap yields this year.

"A weak actual GDP number may cause even more people to price out the possibility of a Fed rate hike in December -- with more moving into 2016,” said Viraj Patel, a currency strategist at ING Groep NV in London.

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The GDPNow tracker aggregates forecasts of components of GDP. It’s refreshed periodically following data including residential construction and durable goods. The Atlanta Fed released the latest figure Tuesday -- ratcheting it down from a previous estimate of 0.9 percent -- after a government report showed durable goods fell 1.2 percent in September.

The model opened traders’ eyes when it predicted first-quarter growth at 0.1 percent, compared with the 0.2 percent rate in the initial official reading in April. Most economists at the time expected a 1 percent pace. The rate was later revised to 0.6 percent.

The index adds to speculation that Fed policy makers won’t raise interest rates this year, let alone at Wednesday’s meeting. Most forecasters predict the Fed will wrap up its two-day policy meeting Wednesday without adjusting rates.

Traders see a 35 percent probability that the Fed will boost its overnight target by its December meeting, according to futures data compiled by Bloomberg. The calculations are based on the assumption the effective fed funds rate will average 0.375 percent after liftoff. The likelihood doesn’t exceed 50 percent until March.

Benchmark 10-year notes yielded 2.06 percent as of 11:43 a.m. in New York, down from about 2.3 percent in mid-September after U.S. labor data fell short of expectations. The yield will rebound to 2.3 percent by year-end, according to the median forecast in a Bloomberg survey.

"As it gets closer and closer to the actual GDP release, it gets more and more accurate," said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. GDP growth of “0.8 percent isn’t an environment where the Fed should be aggressively tightening monetary policy. We’re largely priced to that reality."

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