U.S. traders ramp up bets that the central bank will raise interest rates in the middle of next month after comments from Federal Reserve officials which led to a plunge in the U.S. treasuries.
He expects a rate boost to receive “serious consideration” when policy makers gather March 14-15 in Washington, said San Francisco Fed President John Williams which resulted in a surge in yields on two-year notes. He doesn’t see a need to delay the next move, he added. The case for tightening “has become a lot more compelling,” with most data consistent with above-trend economic growth, said New York Fed President William Dudley.
And based on the assumption that the effective fed funds rate will trade at the middle of the new FOMC target range after the hike, tBottom of Form
he market-implied probability of a March hike soared above 70 percent, from 50 percent Monday. The odds are roughly 60 percent, still almost double what they were two days ago, using the current effective rate of 0.66 percent and the forward OIS rate for the March meeting.
“These two guys seem to be forceful with what they’re saying,” said Timothy High, U.S. strategist in New York at BNP Paribas SA, one of the Fed’s 23 primary dealers. Given that monthly jobs data won’t be released until March 10, less than a week before the Fed decision, “they might be trying to get a message out to the market a little early.”
Touching the highest since December, there was a rise almost 7 basis points in the yield of the coupon maturity that’s the most sensitive to Fed expectations – the benchmark two-year Treasury, which rose to 1.26 percent. There was an increase of 2.39 percent in the 10-year yield.
Noting the flattest since August on a closing basis there was a collapse in the difference between yields on five- and 30-year debt as shorter maturities led declines.
The fact that Fed officials aren’t necessarily confined to waiting for more clarity on the administration’s initiatives before acting on monetary policy is suggested by the jawboning from central bankers and since it came hours before President Donald Trump’s first address to Congress, it was notable.
“For Dudley, this is as hawkish and specific as you’re going to get,” Thomas Simons, senior money-market economist at primary dealer Jefferies LLC, wrote in an email. “All of this looks like a coordinated effort by Fed policy makers to raise expectations for a rate hike at the March meeting.”
Simons said that for further confirmation that the central bank is serious about raising rates in March, the market will still look to the payrolls report next week, inflation data and Trump’s speech. Fed Chair Janet Yellen is scheduled to speak Friday.
After the Fed officials spoke, yields on 10-year New Zealand and Australia bonds also climbed.
(Adapted from Bloomberg)