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Deutsche Bank says Fed should move in March based on the data

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(Bloomberg) — Deutsche Bank AG, one of the Wall Street firms that trade directly with the Federal Reserve, says U.S. policy makers should raise interest rates this month if the latest economic figures are any guide.

“If the Fed is truly data-dependent then they should be raising rates at their next meeting,” Torsten Slok, the chief international economist for the company in New York, wrote in a report Tuesday. Manufacturing, factory jobs, consumer spending and inflation are all improving, according to the report.

Treasuries began March with their biggest selloff this year after the Institute for Supply Management said manufacturing, while shrinking in February, was at the highest level since September. The U.S. economy probably gained 195,000 jobs in February, on top of 151,000 in January, based on a Bloomberg survey of economists before data due Friday.

The benchmark 10-year note was little changed Wednesday with a yield of 1.83 percent as of 6:52 a.m. in London, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in February 2026 was 98 3/32.

Yields climbed nine basis points Tuesday, the biggest jump since Dec. 14. Australian bonds followed their U.S. counterparts, pushing 10-year yields up 11 basis points Wednesday to 2.46 percent.

Deutsche Bank’s Slok recommended investors buy the dollar against a basket of other currencies in December. The Bloomberg Dollar Spot Index is little changed this year.

The odds the Fed will follow its December rate increase with another in 2016 are about 64 percent, futures prices compiled by Bloomberg indicate. The figure has climbed from as low as 11 percent in February. 

Economic Justification

The minutes of the Fed’s most recent meeting, held Jan. 26-27, showed a number of participants stressed the importance of getting people to understand that monetary policy is “data-dependent” and not on a set course. The Fed is scheduled to issue its Beige Book overview of economic activity Wednesday. Its next meeting is March 15-16.

Of 59 economists surveyed by Bloomberg, 49 predict the Fed will leave the upper end of its target band for the federal funds rate at 0.50 percent. The remaining 10 forecast it will increase the figure to 0.75 percent.

“I don’t expect an increase in March,” said Yoshiyuki Suzuki, head of fixed income in Tokyo at Fukoku Mutual Life Insurance, which has $56.6 billion in assets. “The U.S. economy is okay, but the economic indicators are mixed.”

Suzuki said he has stopped buying Treasuries and government bonds in Europe and Japan because yields are too low. He wants to resume purchasing U.S. debt if 10-year yields rise to 2 percent or more, he said.

Fed Bank of New York President William C. Dudley said this week that while he expects inflation to reach the U.S. central bank’s 2 percent target over time, he’s lost some confidence in that prediction following recent turbulence in financial markets.

The Fed’s preferred inflation gauge rose 1.3 percent in January, the government reported last week. It has been below the target since 2012.

U.S. 10-year yields will pass Suzuki’s target and rise to 2.08 percent by June 30, based on a Bloomberg survey of economists, with the most recent forecasts given the heaviest weightings.

–With assistance from Nicholas Reynolds.

See also:

Memo to Yellen: Fed getting desired inflation ahead of forecast

BlackRock Senior Director explains the 3 ways that negative rates are a failed idea

A little more inflation would be good for everyone

Fear and loathing of negative-yield debt: Bond trader’s dilemma



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