DoubleLine, BlackRock Say Rate Hike Near as Traders Take Pause

  • Gundlach says Fed has changed conditions needed for rate rise
  • Rieder sees FOMC action more likely at July meeting than June

BlackRock's Rieder: Data Downtrend Makes Fed Hike Harder

DoubleLine Capital LP and BlackRock Inc. say it’s time for bond traders to start pricing back in the Federal Reserve.

Treasuries rose for the first time in four days after plunging Wednesday. Traders digested the minutes from the Fed’s April meeting, which indicated policy makers considered a rate hike next month likely if the economy continued to improve. Fed Bank of New York President William Dudley said the central bank is moving closer to raising interest rates at one of its next two meetings and the fact this message is getting through to financial markets is welcome news.

Bond traders were caught flat-footed Wednesday after having virtually ruled out the possibility of a Fed move next month. DoubleLine Chief Executive Officer Jeffrey Gundlach wrote in an e-mail Thursday that the Fed is signaling economic data are sufficiently robust to warrant a rate increase. Rick Rieder, chief investment officer of global fixed income at BlackRock, said Federal Open Market Committee officials will likely wait until July to gauge the outcome and implications of a June 23 referendum in Britain that will decide whether the country remains a member of the European Union.

“The Fed has shifted from, ‘if the data pattern improves, we will have the green light to hike,’ to ‘unless the data pattern weakens, we have the green light to hike,’” wrote Gundlach, whose $60 billion DoubleLine Total Return Bond Fund has outperformed 98 percent of its peers during the past five years.

Yields on two-year notes, the coupon security most sensitive to expectations for Fed policy, fell one basis point, or 0.01 percentage point, to 0.89 percent, as of 5 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 0.75 percent security maturing in April 2018 rose 1/32, or 31 cents per $1,000 face amount, to 99 3/4.

The yield on the benchmark 10-year note fell less than one basis point to 1.85 percent.

Treasuries maturing in more than one year have lost 0.3 percent this month, according to Bloomberg U.S. Treasury Bond Index data. This year, they have returned 2.7 percent.

Bond Returns

Derivatives traders are pricing in a 30 percent probability that the Fed raises rates at its June 14-15 meeting, up from 4 percent Monday, based on the assumption that the effective fed funds rate will trade at the middle of the new FOMC target range after the next increase. Those odds rise to 48 percent by July.

"Message received," Richard Clarida, a New York-based global strategic adviser with Pacific Investment Management Co., wrote in a blog post Thursday. "April’s minutes, and Fed communication in the coming weeks, are an effort to align market expectations with the Fed’s intentions."

The unemployment rate is close to the lowest since the financial crisis, while inflation expectations at 1.6 percent, are still below the Fed’s 2 percent target.

"July is a likely candidate" for the Fed to raise rates, Rieder said in an interview with Bloomberg Television. "The minutes were more hawkish than you would have thought," he said, adding that the Fed will have a series of economic reports to examine before the meeting in two months time.

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