Tags: money | market | rates | Fed

Money Market Rates Suggest Investors Are Complacent as Fed Meets

Tuesday, 28 April 2015 02:49 PM

Bullish bets in the futures market suggest traders may be underestimating the risk of the Federal Reserve’s two-day policy meeting buoying money-market rates.

As the Fed debates the evolution of monetary policy in Washington, traders are projecting benchmark rates at about half of what central bank officials foresee through the end of next year. Eurodollar futures show speculators are positioned to profit if yields slide through the end of the gathering Wednesday and after next week’s April employment report.

“The Fed has proceeded very cautiously in changing its forward guidance,” Brian Smedley, a rates strategist at Bank of America Corp. said in a interview on Tuesday. “But you could argue they have done too good a job. At the March FOMC meeting all but 3 participants expected two or more hikes by the end of 2015, and the market is now pricing in a little more than two hikes through mid-2016.”

The net number of contracts hedge funds and other large speculators hold betting on a rise Eurodollar futures this month reached its highest since May 2013, when yields surged in what is known as the Taper Tantrum, according to Commodity Futures Trading Commission data. The so-called net long, trades which benefit if the contracts’ implied yields fall, is a reversal of a net short as recently as March -- that was at a record in August.

Policy makers predict the fed funds rate reaches 0.625 percent by the end of this year and 1.875 percent by December 2016, according to the FOMC’s quarterly Summary of Economic Projection released on March 18. Fed fund futures traders expect the rate will be 0.335 percent in December and 1.005 percent a year later.

Data Dependent

The Federal Open Market Committee was split at its meeting last month on when to begin lifting rates from near zero. Several participants wanted to start tightening in June, while others favored later in the year. The meeting took place before the release of below-forecast jobs data for March of 126,000 new positions.

Economists surveyed by Bloomberg estimate a rebound in April of 225,000 jobs and a drop in the unemployment rate to 5.4 percent from 5.5 percent.

“Front-end rates, like the FOMC, remain firmly data- dependent,” Smedley co-wrote in a note published Monday with Michael Hanson, Bank of America’s U.S. senior economist. “As such, this week’s economic data may prove to be more impactful than the Fed. The main event, however, will be the release of the April employment report on May 8,” they wrote in the note.

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Bullish bets in the futures market suggest traders may be underestimating the risk of the Federal Reserve's two-day policy meeting buoying money-market rates.
money, market, rates, Fed
Tuesday, 28 April 2015 02:49 PM
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