BlackRock Tells Traders to Look Abroad for Treasury-Market Clues

  • External conditions could determine Fed path, Rieder writes
  • Global economic growth remains tepid even as U.S. data improve

BlackRock's Rieder: Still Plenty of Liquidity in Bonds

BlackRock Inc., the world’s largest money manager, says bond traders should look outside the U.S. for hints about the Federal Reserve’s direction on interest rates and how the Treasuries market may respond.

“The path of monetary policy change in the year ahead may be determined as much by what occurs outside the country’s borders than within them; more so than at any time in recent history,” Rick Rieder, BlackRock’s chief investment officer of global fixed income, wrote in a post on the company’s website. Investors should “keep an eye focused outside the U.S., and somewhat outside the Fed’s core dual mandates of employment and price stability.” New York-based BlackRock manages $4.6 trillion.

BlackRock’s note comes after Fed officials last week left interest rates unchanged and pared forecasts for 2016 increases to two from four, citing risks posed by weaker global growth and financial-market volatility even as U.S. economic data improve. The Fed is looking to tighten U.S. policy as central banks in Europe and Japan maintain or increase stimulus. This week, officials including St. Louis Fed President James Bullard, San Francisco Fed President John Williams and Atlanta Fed President Dennis Lockhart have said policy makers may raise rates as soon as their April 26-27 meeting.

U.S. Rates

U.S. 10-year note yields fell six basis points, or 0.06 percentage point, to 1.88 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.625 percent note due in February 2026 rose 17/32, or $5.31 per $1,000 face amount, to 97 23/32.

The difference between yields on two- and 30-year Treasuries, known as the yield curve, narrowed for a second day as investors digested officials’ comments suggesting an April increase is still possible.

“What we’ve noticed in here is sort of a reversal,” said Russ Certo, a managing director at Brean Capital in New York. “You’ve heard four to five spokespersons seemingly countering the message" the Federal Open Market Committee gave last week, Certo said. 

Officials are looking at a variety of factors when considering the path of policy, according to Bullard of the St. Louis Fed.

“We’ve cited global risks,” Bullard said in a Bloomberg Television interview in New York Wednesday. “There are other things entering into the decision other than just the outlook for GDP and inflation.”

Economic Data

The median of officials’ updated quarterly projections, known as the dots, saw the Fed’s policy rate at 0.875 percent at the end of 2016, compared with the 1.375 percent level forecast in December.

Futures traders see a 6 percent chance the U.S. central bank will raise interest rates by April and a 38 percent change of a move by June, according to data compiled by Bloomberg. The calculation assumes the effective fed funds rate will average 0.625 percent after the Fed’s next increase.

Treasuries advanced Wednesday in below-average trading volume, driven in part by investors awaiting a Thursday report forecast to show U.S. durable goods orders declined in February, according to Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

"With softer durable goods before the long weekend and some heightened concerns regarding geopolitical risks, it doesn’t seem like the market would particularly want to go home short for the weekend," Lyngen said. A short position is a wager that an asset will decline in value.

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