Tags: bond market | china | yuan | fed rates

Bond Market Investors: Cheaper Yuan Won't Stop Fed From Raising Rates

Friday, 14 Aug 2015 12:25 PM

The bond market is saying China’s decision to devalue the yuan won’t stop the Federal Reserve from raising interest rates.

Futures contracts indicate traders see a 52 percent chance the U.S. central bank will increase official borrowing costs at policy makers’ Sept. 16-17 meeting, up from 40 percent odds on Aug. 11, when China unexpectedly devalued its currency. At the same time, economists at the world’s biggest bond shops are paring their bets on how fast Treasury yields will rise.

“The post-liftoff pace is increasingly moving into focus, but September still matters a lot, particularly with markets still not fully prepared for it,” said Michael Leister, a senior rates strategist at Commerzbank AG in Frankfurt.

“Our economists still expect a September lift-off, with markets about 50-50, hence there is room for Treasury yields to rise and the curve to flatten.”

Benchmark Treasury 10-year note yields rose 1 basis point, or 0.01 percentage point, to 2.20 percent as of 10:54 a.m. New York time, according to Bloomberg Bond Trader data.

Commerzbank, which forecasts a Fed rate increase in both September and December, predicts the yield will reach 2.70 percent by year-end.

Factory Production

Treasuries fell after a report showed factory production rose more forecast in July as automobile assembly jumped to the highest since 1978. The 0.8 percent increase was the biggest since November and followed a revised 0.3 percent decline in the prior month, the Federal Reserve reported Friday.

An earlier report showed wholesale prices in the U.S. climbed at a slower pace in July. The 0.2 percent increase in the producer-price index followed a 0.4 percent gain in June, Labor Department figures showed Friday in Washington.

The producer-price report “bolstered expectations that these price pressures have been modestly building,” said Edward Acton, a U.S. government-bond strategist at Royal Bank of Scotland Group PLC’s RBS Securities unit in Stamford, Connecticut. “The curve is taking this as a subtle vote of confidence for hike timing as well as pace.”

Acton expects the Fed to raise interest rates in September.

Yuan Tumble

Economists are even more confident than the bond market that the Fed will raise borrowing costs this year. The central bank will boost its main policy rate next month for the first time since 2006, according to 77 percent of forecasters in a Bloomberg survey taken Aug. 7-12. All respondents were given the opportunity to revise their forecasts following the yuan news.

China’s yuan tumbled 1.8 percent on Tuesday, the biggest decline in two decades, when the nation unexpectedly began devaluing its currency.

The initial reaction in the Treasuries market was a rally, driven by demand for the safest assets, on speculation the Chinese government was acting on concern that the world’s second-largest economy was slowing. Even so, 10-year Treasuries are headed for their first weekly decline since early July.


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The bond market is saying China's decision to devalue the yuan won't stop the Federal Reserve from raising interest rates.Futures contracts indicate traders see a 52 percent chance the U.S. central bank will increase official borrowing costs at policy makers' Sept. 16-17...
bond market, china, yuan, fed rates
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2015-25-14
Friday, 14 Aug 2015 12:25 PM
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