Fed Rate-Increase Odds at 74% in Market as Pimco Sees Liftoff

  • `Very high probability' Fed will move `at last,' Pimco says
  • U.S. Treasury set to sell five-year notes on Tuesday

The probability the Federal Reserve will raise interest rates at its next meeting in December is at 74 percent, and Pacific Investment Management Co. says a move is likely.

QuickTake The Fed’s Countdown

The chances the central bank will act at its Dec. 15-16 session have increased from about 30 percent in mid-October, futures contracts show. The U.S. is scheduled to sell $35 billion of five-year notes Tuesday, after a two-year auction Monday drew the highest yield in five years, reflecting expectations among traders for rising interest rates.

“The baseline view in markets and at Pimco has converged to a very high probability that –- at last -– the Fed begins the process of liftoff,” Richard Clarida, New York-based global strategic adviser for the company, wrote in a report Monday. In February, Clarida correctly predicted the Fed would drop its pledge to be patient on raising rates from its March statement.

The benchmark U.S. 10-year note yield fell three basis points, or 0.03 percentage point, to 2.21 percent as of 8:33 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 2.25 percent security due in November 2025 was 100 11/32. The yield touched 2.2 percent Tuesday, the lowest since Nov. 4, after Turkey said it shot down a Russian warplane that entered Turkish airspace.

Debt prices remained higher after Commerce Department data showed the U.S. economy grew at an annualized rate of 2.1 percent in the third quarter, compared with the 1.5 percent clip reported previously.

The rising chances of a Fed shift in the futures market combined with the advance in short-maturity yields reflect a growing consensus among traders that the central bank is about to move. Minutes published last week showed policy makers crafted their October statement to stress it may be appropriate to act in December. A U.S. rate increase would be the first since 2006.

August High

The probability of a Fed move in December is the highest since August, based on the assumption that the effective fed funds rate will average 0.375 percent after liftoff, compared with the current range of zero to 0.25 percent.

In addition to selling five-year debt Tuesday, the U.S. is scheduled to offer $13 billion of two-year floating-rate securities. It will auction $29 billion of seven-year notes Wednesday.

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