Bond Traders Rule Out April Rate Rise as Fed Forecasters on Hold

  • Fed caught in 'negative feedback loop,' Goldman's Beinner says
  • Treasuries tumble on improved outlook for jobs, inflation

Futures traders see zero chance that the Federal Reserve will raise interest rates when it meets next week, even as an improved outlook for U.S. inflation and economic growth bolsters the case for tighter monetary policy.

Treasuries fell this week by the most since November as data showed jobless claims dropped to the lowest since 1973 while oil extended a two-month surge. As the U.S. central bank attempts to tighten policy while its major global peers continue easing, it’s stuck in a cycle that’s hindering its shot at normalization, according to Goldman Sachs Asset Management.

“If the Fed is talking about raising interest rates, that puts upward pressure on the dollar,” Jonathan Beinner, global fixed-income chief investment officer at the $1.1 trillion money manager, said in an interview on Bloomberg Television Friday. “That feeds back into weakening growth. There’s this negative feedback loop and it’s definitely pointing to a much, much slower tightening cycle in the U.S."

When Fed officials meet April 26-27, they again face the challenge of telegraphing any policy moves without prompting a market reaction that undermines the effort. Officials last month cut their forecasts for rate increases in 2016 to two from four, saying global economic and financial developments continue to pose risks. Futures traders this week boosted the probability they assign to a rate increase in 2016 to 63 percent from 50 percent a week earlier, even as they rule out an April move. Treasuries tumbled this week as the dollar strengthened against the euro and the yen.

Benchmark 10-year note yields rose 14 basis points, or 0.14 percentage point, to 1.89 percent as of 5 p.m Friday in New York, according to Bloomberg Bond Trader data, the biggest climb since the week ended Nov. 6. The price of the 1.625 percent security due in February 2016 was 97 21/32.

Yields on U.S. two-year notes, the securities most sensitive to Fed policy expectations, rose eight basis points to 0.82 percent. The U.S. will sell $26 billion of the securities on April 25, the first of three fixed-rate note auctions next week totaling $88 billion.

Policy Divergence

A bond-market gauge of inflation expectations rose this week by the most in almost two months and approached the highest since August. The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of where traders see annual consumer-price gains over the life of the debt, was 1.65 percentage points, up from 1.56 percentage points a week ago.

The yen fell two percent against the dollar on Friday on news the Bank of Japan was considering expanding negative interest rates to loans. The dollar also strengthened against the euro after European Central Bank President Mario Draghi on Thursday said he was willing to expand stimulus if Europe’s outlook worsens.

“It is central-bank ping pong,” said Russ Certo, a managing director at Brean Capital in New York. “They smash it over the net, weaken their currency, and then wait for the next turn.”

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