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El-Erian: Fed Rate Move Close Call as Bonds Suggest US Will Wait

El-Erian: Fed Rate Move Close Call as Bonds Suggest US Will Wait

Monday, 14 September 2015 08:54 AM

Mohamed A. El-Erian says the chance of a Federal Reserve interest-rate increase this week is too close to call. The bond market suggests there’s no need to worry about the meeting being a cliffhanger because policy makers will wait.

The probability of a move at the Fed’s Sept. 16-17 meeting is about 49 percent, El-Erian, the chief economic adviser at Allianz SE, wrote in a Bloomberg column last week. While the U.S. economy is improving, slowing growth elsewhere combined with rising financial-market volatility are reasons to hold off, he wrote. “It is that close,” he wrote.

Investors are betting it won’t be close.Futures contracts show the oddsof a shift this month have dropped to 28 percent, according to data compiled by Bloomberg. The probabilities are about 40 percent for the Fed’s October meeting and 59 percent for December. The figures are based on the assumption that the benchmark will average 0.375 percent after the first increase, versus the current target range of zero to 0.25 percent.

“The U.S. economy continues to recover,” said Hiroki Shimazu, senior market economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s second-largest bank. “However, for most market participants, volatility of the market is much more important” in evaluating what the Fed will do, he said.

Treasury 10-year note yieldswere little changed at 2.19 percent as of 6:47 a.m. in London, based on Bloomberg Bond Trader data. The price of the 2 percent security due in August 2025 was 98 11/32.

Rising Volatility

Bond market volatility rose in August to the highest level since February, based on Merrill Lynch’s MOVE Index. The Chicago Board Options Exchange’s Volatility Index, which is known as the VIX and measures expected stock-market swings, surged last month to the most since 2009.

The biggest bond investors say it’s not time to abandon fixed-income assets.

“The Fed will do a great deal to head off the probability that the market prices in too many forward rate hikes,” said Gemma Wright-Casparius, who manages about $50 billion in Treasuries at Vanguard Group Inc., the largest private holder of U.S. debt. Below-target inflation calls for only a gradual tightening of monetary policy, she said.

Pacific Investment Management Co. and Fidelity Investments are betting the Fed will keep rates low until inflation accelerates. BlackRock Inc., the world’s largest investment company, favors intermediate-maturity U.S. debt as the sweet spot mixing safety and liquidity with returns.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, show the outlook is for annual gains of 1.59 percent. The Fed’s target is 2 percent.


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Mohamed A. El-Erian says the chance of a Federal Reserve interest-rate increase this week is too close to call. The bond market suggests there's no need to worry about the meeting being a cliffhanger because policy makers will wait.The probability of a move at the Fed's...
el-erian, rate, fed, bonds
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2015-54-14
Monday, 14 September 2015 08:54 AM
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