Bond Traders Show Skepticism of Goldman's Forecast for Fed Hikes

  • Market is unprepared for Fed shift, Nomura's John Gorman says
  • U.S. plans to sell three-, 10-, 30-year debt starting Tuesday

Bond traders are betting the odds of a Federal Reserve interest-rate increase this year are less than a coin toss, clashing with Goldman Sachs Group Inc.’s call for three moves.

Futures contracts indicate there’s about a 48 percent chance the Fed will follow its December rate increase with one more in 2016. The figure has plunged from more than 90 percent at the end of 2015 as Fed Chair Janet Yellen and other officials warned that heightened risks in the global economy are reason for the U.S. central bank to delay tightening policy.

Goldman Sachs, one of the 22 primary dealers that trade directly with the Fed, said in a report last week policy makers may not stick to their dovish stance. “This could see the Fed shift hawkish again, in line with our U.S. economists’ view for three hikes this year,” strategists Robin Brooks, Silvia Ardagna and Michael Cahill wrote.

Of 55 firms surveyed by Bloomberg, Goldman Sachs is one of only seven forecasting the Fed will raise its benchmark three times in 2016. At the start of 2015, the company predicted the Fed would raise rates twice during the year. Policy makers moved once.

Treasuries fell Tuesday, with the benchmark 10-year note yield rising one basis point to 1.74 percent as of 6:48 a.m. in London, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in February 2026 fell 1/8, or $1.25 per $1,000 face amount, to 98 31/32.

Australia, Japan

Australia’s bonds declined after an industry report showed business confidence jumped in March. The 10-year yield rose six basis to 2.47 percent, the biggest increase in a month. Japan’s 30-year yield fell to a record 0.39 percent.

Investor appetite for Treasuries will be tested this week when the U.S. sells $24 billion of three-year notes Tuesday, $20 billion of 10-year debt Wednesday and $12 billion of 30-year bonds April 14.

Two- and three-year notes stand to fall if the Fed returns to raising rates because they tend to track what the central bank does with its benchmark.

“Those auctions might go well now but in very short order, if people start coming around to the fact that the Fed is right and the market is wrong, and there’s going to be a hike, those auctions are going to have a completely different look in a couple months time,”  said John Gorman, head of U.S. debt trading for Asia and the Pacific in Tokyo at Nomura Holdings Inc. “The market is unprepared.” Nomura is also a primary dealer.

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