BlackRock’s Rieder Sure of December Fed Hike as Treasuries Fall

  • Strategist expects two rate increases in 2017, three in 2018
  • U.S. two-year note yield rises to highest level since June 2

Treasuries fell, with two-year note yields reaching the highest level since June, as BlackRock Inc.’s Rick Rieder said he considers a December Federal Reserve interest-rate hike a done deal.

Yields on two-year notes, the coupon maturity most sensitive to Fed policy expectations, rose for a fifth day as traders this week have added to wagers on tighter monetary policy by the end of the year. A gauge of the yield curve steepened as a report showed the U.S. service sector expanded more than forecast, boosting the outlook for economic growth.

Futures data show the probability of a hike by year-end has climbed even as traders see only a 19 percent chance of an increase at the Fed’s Nov. 1-2 policy meeting, a week before the U.S. presidential election. After liftoff from near zero last December, officials have repeatedly pared projections for the path of rates this year amid tepid U.S. economic data and signs of stalling global growth. A gauge of expected price swings in Treasuries fell to the lowest since 2014 amid signs that central bank in Europe and Japan are in no rush to taper bond-buying programs.

“I’m certain they’re going in December, assuming the election is pretty much as expected,” Rieder, chief investment officer of about $700 billion of fixed income at BlackRock, said Tuesday at the Impact 2016 conference in San Diego, hosted by Charles Schwab Corp. “I think the plan is they go once in December and twice next year and three times in ’18.”

Higher Yields

The two-year note yield climbed two basis points, or 0.02 percentage point, to 0.87 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data, the highest closing level since June 2. The price of the 0.75 percent security due in October 2018 fell 1/32, or $0.31 per $1,000 face amount, to 99 3/4.

Benchmark U.S. 10-year yields rose four basis points to 1.79 percent. The gap between yields on five- and 30-year notes, a gauge of the yield curve, steepened to about 1.24 percentage points.

"Market participants have come to conclusion that higher yields and steeper curve are more appropriate,” said Boris Rjavinski, an interest-rate strategist at Wells Fargo Securities LLC, one of 23 primary dealers that trade with the central bank.

Traders are pricing in a 72 percent probability of tighter policy by year-end, up from a 64 percent chance seen a week ago, according to futures data compiled by Bloomberg. The calculations assume that the effective fed funds rate will average 0.625 percent after the next increase. 

Regardless of when the Fed moves, this policy-tightening cycle is poised to be the slowest and shallowest in recent history, based on the market for overnight index swaps, which reflect expectations for the fed funds effective rate. Swaps trading implies the rate will be about 0.7 percent in a year, and just 0.85 percent in two years.

The U.S. auctioned $34 billion in five-year notes on Wednesday. Primary dealers, which are obligated to bid at debt sales, took the highest amount at an auction of the securities since July.

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