Bond Traders Push Back Rate Forecasts as Fed Stuck After Liftoff

  • Futures markets cut probability of June increase to 12 percent
  • BNY, UBS among strategists seeing Fed on hold until September

Another Federal Reserve meeting, another scramble to pare bets on the path of interest-rate increases.

Futures traders pushed out expectations for when the Fed will next tighten monetary policy after officials this week left rates unchanged. The Fed’s policy statement prompted strategists at financial institutions including BlackRock, BNY Mellon, Toronto Dominion Bank, and UBS Securities LLC to suggest officials are unlikely to raise rates when they next meet in June and instead may delay until September.

The shifts in sentiment come after the Federal Open Market Committee removed a reference to global risks from its latest policy statement and emphasized concerns about U.S. economic progress. The Fed said growth in household spending had “moderated” since its March meeting, when officials lowered forecasts for 2016 rate increases from four to two, even as labor-market conditions improved. Commerce Department data April 28 showed gross domestic product grew at a 0.5 percent annual rate in the first quarter, lower than the 0.7 percent median projection in a Bloomberg survey.

“The economic data we saw this week confirmed that Fed-on-hold is the best bet we have going forward,” said Sean Simko, who manages $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “We’re expecting slower growth, so there’s no reason to march higher more than one time this year.”

Treasuries gained this week, with the 10-year note yield falling five basis points, or 0.05 percentage point, to 1.83 percent as of 5 p.m. in New York. The price of the 1.625 percent security due in February 2026 was 98 1/8.

Higher Bar

Futures show traders assign a 12 percent probability that the central bank will boost borrowing costs by June, down from a 20 percent chance seen a week ago. They price in a 58 percent chance that the Fed will raise rates this year.

"The April FOMC statement offered no strong signals pointing toward a rate hike in June,” Morgan Stanley strategists including Matthew Hornbach wrote in an April 28 client note. “With a mixed assessment of economic data, and growth that ‘appears to have slowed,’ the bar for economic data to justify a rate hike in the next weeks has become higher.”

Data next week will show that the U.S. economy added 200,000 jobs in April while the unemployment rate held steady at 5 percent, according to economist forecasts.

Not everyone sees the Fed waiting until late this year to raise rates. Goldman Sachs Group Inc. said in a report April 28 that the Fed would raise rates three times this year -- in June, September, and December -- and forecasts a year-end yield of 2.75 percent on the 10-year note. Francesco Garzarelli, the London-based co-head of fixed-income strategy at Goldman, wrote that Treasuries “look expensive.”

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