Money Markets Show Earlier Rate Increase Sentiment Building

Updated on

Money-market rates are suggesting that trader expectations for an earlier-than-anticipated increase in borrowing costs by the Federal Reserve are gaining traction.

Implied yields on federal-fund futures that expire in July 2015 were at 0.28 percent, up from 0.255 percent at the end of last week and 0.185 percent in October. Eurodollar futures that expire in June, and are settled to the three-month U.S.-dollar London interbank offered rate, have risen 0.1 percentage point this month to 0.46 percent. Spot three-month Libor reached 0.25210 percent, the highest since September 2013. Fed Chair Janet Yellen signaled on Dec. 17 interest rates may rise by the middle of next year.

Yellen “went out of her way to emphasize that they could hike at any meeting and that it’s data-dependent, so they could do it sooner if there is faster progress,” said Brian Smedley, an interest-rate strategist at Bank of America Corp. in New York. “The market is pricing in high odds of a mid-2015 hike.”

Yellen spoke to reporters on Dec. 17 after a Fed meeting, suggesting a “patient” approach by policy makers may translate into a rate boost after the “next couple of meetings.” An increase may come at any central-bank meeting if economic data warrant it, she said, not just those whose schedule includes a press conference. The rate has been held in a range of zero to 0.25 percent since 2008.

‘Getting Closer’

Fed Bank of San Francisco President John Williams said today policy makers’ use of the word patient represents a move toward a period of rising interest rates.

The shift from a vow to keep rates low for a considerable period “was a natural progression as we begin moving closer to normalizing monetary policy,” Williams said in an interview on Bloomberg Radio with Kathleen Hays and Vonnie Quinn. Policy makers are “getting closer to consider normalizing policy and I consider it a bridge.”

Overnight rates, from federal funds to repurchase agreements, have been rising this month as the central bank expands testing of its tools to exit from accommodative policy and raises the interest rates in the tests, Smedley said.

The Fed began a series of four term reverse-repo operations this month, adding to its daily overnight offerings, as it tests options it will use when it raises interest rates.

The fed effective, or a volume-weighted average of rates on trades arranged by major brokers, was 0.13 percent on Dec. 17, a level it reached this month for the first time since May 2013. The rate was as low as 0.06 percent as recently as March.

The general-collateral Treasury repo rate opened today at 0.21 percent, according to ICAP Plc, the world’s largest inter-dealer broker.

A Depository Trust and Clearing Corp. index of overnight general-collateral interdealer repo rate was 0.204 percent yesterday. It reached 0.221 percent on Nov. 28, the highest level since October 2013.