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PIMCO at Odds With Goldman on Yellen as September Rate Bets Rise

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Federal Reserve Chair Janet Yellen’s speech Friday was hawkish enough for Goldman Sachs Group Inc. to boost the odds of a September interest-rate increase, while Pacific Investment Management Co. said there was nothing of note in her remarks.

Bond traders agree with Goldman Sachs, with the market-implied probability of action next month rising after Yellen said the case for tightening policy has strengthened. The bank, one of the Treasury market’s 23 primary dealers, now puts the “subjective odds” of a move in September at 40 percent from 30 percent previously, economists led by Jan Hatzius wrote in a note.

Fed funds futures indicate a 42 percent chance that the central bank will raise rates next month, up from 22 percent Aug. 19 and zero in late June after the U.K. voted to leave the European Union. The odds of an increase by December have risen above 60 percent from a low of 8 percent reached June 27, according to futures data compiled by Bloomberg. The calculation assumes the effective fed funds rate will average 0.625 percent after the central bank’s next increase.

U.S. economy watchers are turning their attention to August payrolls figures later this week for signs of whether there’s continued strength in the jobs market.

“I’m sure the Jackson Hole setting is lovely for this annual conference, but the Chair did not want to make any real news, and she succeeded,”  Richard Clarida, a global strategic advisor at Newport Beach, California-based PIMCO, wrote in a client note. Yellen’s remarks didn’t shed any light on “the near-term path for the normalization of interest rates, and the Fed’s longer-run inflation-targeting framework,” he said.

Treasury Yields

The two-year Treasury note yield was little changed at 0.83 percent as of 9:25 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 0.75 percent security due in August 2018 was 99 26/32. The yield touched 0.85 percent, the highest since June 3.

The two-year notes are more sensitive to the outlook for monetary policy than longer-dated securities.

With traders ramping up bets on a 2016 rate increase, the jump in yields on shorter maturities has outpaced longer-dated debt. As a result, the extra yield that 30-year bonds offer over two-year notes shrank to 1.41 percentage points, set for the lowest closing level since 2007. The 30-year yield fell four basis points, or 0.04 percentage point, to 2.25 percent.

The benchmark U.S. 10-year note yield fell three basis points to 1.6 percent.

August Payrolls

Yellen’s speech puts the spotlight on Friday’s August labor report, which is projected to show employers added 180,000 jobs, following a gain of 255,000 in July. The monthly labor force number has exceeded expectations the past two readings, pointing to renewed vigor in the employment market.

“Unless we have a blow-up payrolls number on Friday, and strong data between now and the September meeting, she’ll probably go in December,” said John Gorman, head of non-yen rates trading for Asia and the Pacific at Nomura Holdings Inc. in Tokyo. “The short end of the curve is a bit on the dangerous side, because markets are still trying to decide whether the Fed is going to hike in September or December — which means the two-year notes can sell off quite a lot.”

— Check out Can Markets Predict Presidential Elections? on ThinkAdvisor.


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