Fed Hike Is Certainty for Bond Traders as Market Odds Reach 100%

  • Five-year Treasury auction draws highest yield since December
  • Easy for Fed to raise rates as stocks are gaining, Kuriki says

Why a Fed Hike Seen as Certain as Death Itself

A Federal Reserve interest-rate increase next month is as certain as death and taxes for bond traders, as speculation mounts that Donald Trump’s reflationary policies will mean a quicker pace of monetary tightening.

QuickTake The Fed Lifts Off, Barely

The market-implied odds of action at the central bank’s Dec. 13-14 meeting have reached 100 percent, according to Bloomberg calculations based on futures. An auction of five-year Treasuries Tuesday drew the highest yield for the maturity since December, before a sale of seven-year debt Wednesday. A bond market gauge of inflation expectations is close to its highest level since 2015.

President-elect Trump campaigned on promises of “massive” tax cuts and spending of as much as $1 trillion over a decade to rebuild the nation’s infrastructure. His unexpected victory in the Nov. 8 election spurred a rout in bonds, a surge in the dollar and gains in stocks. A rate hike “could well become appropriate relatively soon,” Fed Chair Janet Yellen said last week.

“After the Trump Shock, it’s easy for the Fed to hike, because inflation expectations have gone up,” as have stocks, said Hideaki Kuriki, a debt investor in Tokyo at Sumitomo Mitsui Trust Asset Management. He said he’s “100 percent” certain of tightening next month.

The two-year Treasury note yield climbed two basis points, or 0.02 percentage point, to 1.09 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader Data. It reached the highest since 2010. The benchmark 10-year note yielded 2.31 percent, after reaching 2.36 percent Friday, the highest since November 2015.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was about 1.95 percentage points, after rebounding from as low as 1.12 percentage points in February. 

Treasury 10-year yields of around 2.3 percent are attracting Japanese and European investors, though U.S. funds are expecting them to rise further, Sumitomo Mitsui’s Kuriki said. They will climb to around 2.5 percent once investors become more concerned about the fiscal deficit under a Trump administration, and the break-even rate may reach 3 percent, he said.

The yield will rise to almost 2.5 percent at the end of 2017, according to a Bloomberg survey of analysts with the most recent forecasts given the heaviest weighting. 

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