Fed's Delay in Raising Rates Reins in Treasury Selloff Forecasts

  • Analysts predict 10-year yield will climb to 2.45% by year-end
  • U.S. sovereign bonds set for biggest quarterly gain since 2014

Treasury market analysts predicting a selloff in the final quarter of the year are tempering estimates after the Federal Reserve refrained from raising interest rates and tumbling equities around the world drove U.S. 10-year yields to the lowest in a month.

Benchmark yields will climb to 2.45 percent by the end of 2015 from 2.10 percent on Wednesday, based on Bloomberg surveys of economists with the most recent forecasts given the heaviest weightings. Analysts have lowered their projections for four straight weeks, down from 2.56 percent at the end of August. 

A measure of global equities has dropped about 6 percent since Fed Chair Janet Yellen refrained from increasing rates on Sept. 17, citing international uncertainty and tepid inflation. While the central bank’s preferred gauge of price pressures hasn’t exceeded 0.3 percent this year, a strengthening labor market is adding pressure on policy makers to raise rates for the first time in almost a decade. Central bank officials including Yellen and William C. Dudley have said in recent days that liftoff is still likely this year.

“The market will remain well supported and the Fed will have to end up providing guidance that there’s limited tightening likely over a long period,” said Adam Donaldson, head of debt research at Commonwealth Bank of Australia in Melbourne. “It’s very difficult for the Fed to raise rates when the rest of the world is stuck on hold and contemplating easier policy.”

Treasuries fell Wednesday, halting a two-day rally. The benchmark 10-year note yield climbed five basis points, or 0.05 percentage point, as of 6:36 a.m. New York time, according to Bloomberg Bond Trader data. The 2 percent security due in August 2025 fell 13/32, or $4.06 per $1,000 face amount, to 99 1/8.

The yield will stay in a range of 2.10 percent to 2.30 percent through year-end and the central bank will struggle to raise its main rate above 1.5 percent over the next few years, Commonwealth Bank’s Donaldson said. The central bank has left its benchmark in a range of zero to 0.25 percent since December 2008.

Treasuries have returned 2.1 percent since June 30, set for the biggest quarterly gain this year, according to the Bloomberg U.S. Treasury Bond Index. Ten-year yields have declined 25 basis points in the same period.

U.S. companies added 190,000 workers in September, matching the August figure, according to a Bloomberg survey before ADP Research Institute releases the data Wednesday. Employers added 200,000 jobs this month and the unemployment rate held at a seven-year low of 5.1 percent, Labor Department data due Friday will show, according to a separate survey.

‘Pretty Well’

The economy is doing “pretty well,” though growth in the second half will be a little weaker than in the first, New York Fed President Dudley said Sept. 28. There are risks that a slowdown in international growth may hamper U.S. economic activity, Fed Chair Yellen said last week.

Futures traders put the chance of a rate increase by December at 43 percent, and at 50 percent by January. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after liftoff.

The difference between yields on one-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, has been negative since July 22 and fell to minus 2.13 percentage points on Monday. The 10-year break-even rate was 1.41 percent.

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