Bond-Market Inflation Gauge Rises to Six-Week High Before Yellen

  • Futures show about 50% chance Fed will raise rates by December
  • Yellen to address lawmakers at 10 a.m. in Washington

The inflation outlook in the Treasuries market climbed to the highest level in six weeks, driving speculation the increase, combined with improving wage growth, will help encourage the Federal Reserve to raise interest rates.

Fed Chair Janet Yellen is scheduled to testify before U.S. lawmakers at 10 a.m. Wednesday in Washington as she contemplates making a rate move at the next policy session Dec. 15-16. The testimony may present an opportunity for Yellen to reinforce the Fed’s message on the outlook for rates after officials, at the end of their October meeting, raised the possibility of the first increase since 2006 coming next month.

Average hourly earnings rose 2.3 percent in October from a year earlier, according to a Bloomberg survey of economist estimates before the monthly employment report Nov. 6, matching its highest growth rate in 2015. The economy added 182,000 jobs, based on responses in a separate survey, versus 142,000 in September.

“Any reasonable number will make the Fed go,” said Ali Jalai, a Treasuries trader at Bank of Nova Scotia in Singapore. “This one hike is almost a done deal.” Nova Scotia is one of the 22 primary dealers that trade directly with the U.S. central bank.

U.S. 10-year note yields were little changed at 2.21 percent as of 7:03 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 2 percent security due August 2025 was 98 6/32. The yield climbed to 2.22 percent on Tuesday, the highest since Sept. 17.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, climbed to 1.59 percentage points Tuesday, the highest level since Sept. 17. The figure has increased from this year’s low of 1.38 percent set in September, though it’s still less than the Fed’s 2 percent target for inflation.

Attractive Investment

The odds of a rate increase in December are only about 20 percent, according to Hideo Shimomura, chief fund investor in Tokyo at Mitsubishi UFJ Kokusai Asset Management, which oversees $99 billion.

“Average hourly earnings aren’t enough to justify that inflation is picking up,” he said. “In terms of wage growth, the Fed requires 3 percent to 4 percent. Inflation expectations seem like they’re bottoming out, but it’s far from picking up.” Treasuries are attractive, he said.

New York Fed President William C. Dudley and Vice Chairman Stanley Fischer are also scheduled to speak Wednesday.

Traders see a 52 percent chance the central bank will raise its benchmark rate at its next meeting, according to futures data compiled by Bloomberg. The calculation assumes the effective fed funds rate averages 0.375 percent after the first increase, compared with the current zero-to-0.25 percent target range.

Before it's here, it's on the Bloomberg Terminal.