Gross Sees Clear Path for December Fed Hike as Bond Yields Soar

  • Futures show 64% probability of interest-rate hike by year-end
  • BlackRock’s Rieder sees inflation expectations climbing

Bond traders may have finally gained some faith in the Federal Reserve.

Treasuries advanced for the first time in six days after Labor Department data Friday showed employers added fewer jobs than forecast in September. Still, yields on two- and 10-year notes held near the highest since June as the report said the share of working-age people in the labor force climbed to a six-month high and wage growth picked up. Traders pared bets on a Fed interest-rate hike next month while maintaining wagers that the central bank will tighten policy by December.

Investors are growing more confident that the Fed will move by year-end after officials have stood pat this year and repeatedly pared projections for the path of rates. U.S. data this week showing service-sector expansion and declining jobless claims buoyed bets on policy tightening and helped drive a bond-market gauge of inflation expectations to the highest since May. The probability of a rate hike by year-end climbed to the highest since August, according to futures data compiled by Bloomberg.

“There’s nothing much there to keep the Fed from raising interest rates,” Bill Gross, chief investment officer at Janus Capital Group, said in a Bloomberg Television interview Friday. “Whether its November or December I’m not sure, but at some point they have to.”

The benchmark 10-year note yield rose 12 basis points this week, or 0.12 percentage point, to 1.72 percent. The price of the 1.5 percent security due in August 2026 was 98 1/32.

Yields on U.S. two-year notes, the coupon maturity most sensitive to Fed policy expectations, rose seven basis points to 0.83 percent.

‘Foregone Conclusion’

The Labor Department report showed employers added 156,000 positions last month, versus a median forecast of 172,000 in a Bloomberg survey of economists. The increase followed a rise in August that was more than previously estimated.

“Nothing in today’s data should derail the Fed from a likely rate hike at its December policy meeting, which barring an unexpected shock to the economy or markets, seems to us a foregone conclusion,” Rick Rieder, the New York-based global chief investment officer of fixed income at BlackRock Inc., wrote in a note.

Futures traders saw about a 17 percent probability of a rate increase in November on Friday, down from about 24 percent a day earlier. For a hike by December, the probability was little changed at 64 percent. The calculation is based on the assumption the effective fed funds rate will trade at the middle of the new range after the central bank’s next boost.

Inflation Expectations

A Treasury-market gauge of inflation expectations over the next decade known as the break-even rate this week reached the highest level since May. The difference between yields on 10-year notes and equivalent-maturity Treasury Inflation Protected Securities was about 1.64 percentage points Friday. The Fed targets a 2 percent inflation rate.

“The recent significant improvement in break-even inflation levels in the market will be a continuing trend,” Rieder wrote, adding that wage growth and tightening labor-market conditions signal higher inflation levels next year. “We think that while this will allow the Fed to move in December, they will be deliberate in 2017, and consequently, may let inflation run hotter for a period of time.”

The Treasury plans to sell $24 billion in three-year notes and $20 billion in 10-year notes Oct. 12, and $12 billion in 30-year bonds the following day.

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