Bond Traders Left Doubting Rate Hike as Fed Speakers Go Silent

  • Brainard urges prudence as policy makers set to meet next week
  • Traders pare bets on a September rate increase after speech

Global Central Banks' Scattered Approach to Policy

The bond market is signaling growing skepticism over the prospect of a Federal Reserve interest-rate increase before next week’s policy meeting.

QuickTake The Fed Lifts Off, Barely

Traders reduced bets on a September hike after Fed Governor Lael Brainard, the final scheduled speaker before the Sept. 20-21 gathering, said prudence is warranted as boosting borrowing costs poses risks. The remarks surprised investors who’d been bracing for a sign that the central bank was set to raise rates. The market-implied chance of a September hike fell to 22 percent, based on the assumption that the effective fed funds rate will trade at the middle of the new target range. It was 28 percent before her remarks.

Bond traders have grappled with signals from policy makers since Fed Chair Janet Yellen rekindled expectations for a 2016 hike with comments in August. Boston Fed President Eric Rosengren said last week there was a reasonable case for gradual tightening. His counterpart in Atlanta, Dennis Lockhart, on Monday repeated a call for a “serious discussion” about an increase this month.

“Everyone was getting so much hawkish overload over the past few weeks,” said Blake Gwinn, a U.S. rates strategist in Stamford, Connecticut, at RBS Securities, one of the Fed’s 23 primary dealers. “Heading into the meeting, by no means is the issue settled for a September hike.”

Yields on the benchmark 10-year note were little changed at 1.66 percent as of 8:52 a.m. New York time, according to Bloomberg Bond Trader prices. The yield on Monday reached the highest since June 24, when the U.K.’s vote to leave the European Union roiled global markets. The price of the 1.5 percent security due in August 2026 was 98 1/2.

Rebound Glimmer

Brainard’s comments sparked a modest rebound in Treasuries after government debt around the world plunged last week when the European Central Bank surprised traders by holding off on implementing more stimulus. The rout served as a wake-up call following weeks of declining volatility. U.S. 10-year notes ended last week with their worst two days since July, in a rout that sent yields up 0.14 percentage point.

An unprecedented auction calendar added to Monday’s complexity for bond traders. The Treasury Department sold $24 billion of three-year notes and $20 billion of 10-year debt at 1 p.m. New York time. While the government has issued obligations of differing maturities on the same day, the simultaneous closings were unique for coupon note sales, said Aaron Kohli at BMO Capital Markets Corp., another primary dealer.

The demand for both maturities auctioned Monday was weaker than usual, as indicated by the bid-to-cover ratio, which was 2.35 for the 10-year sale and 2.77 for the three-year notes, below the average from the past 10 sales.

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