By Min Zeng
Investors are clearing their calendars for a summer
interest-rate increase.
Wagers on rising U.S. rates last week hit their highest level
since 2014, according to a report from TD Securities on eurodollar
futures trading. A separate market, for federal-funds futures, is
now pricing in a 58% likelihood of a Federal Reserve rate move at
July's policy meeting, up from 28% a month ago, according to CME
Group data.
The data mark a profound shift from the market's mindset as
recently as a month ago. Then, few investors expected the Fed to
press the button this summer, reflecting lingering anxiety from the
early-2016 swoon in stocks, commodities and bond yields.
But many investors have since changed their minds, thanks to
continued signs of steady U.S. growth, a placid period overseas and
increasing signals from the Fed that officials intend to keep
gradually raising interest rates, brushing off skeptics who warn
that the central bank risks cooling a tepid recovery by moving
prematurely.
Some analysts and portfolio managers accelerated their
rate-increase timetables after seeing the minutes for the Fed's
April policy meeting, released on May 18, and hearing comments from
Chairwoman Janet Yellen, Federal Reserve Bank of New York President
William Dudley and a handful of others.
Ms. Yellen said Friday a rate increase would be appropriate
"probably in the coming months" if the economy and labor market
continue to strengthen.
"It is clear the Fed would like to hike rates this summer," said
Kam Poon, a portfolio manager specializing in short-term debt
instruments at Aberdeen Asset Management, which had $420.9 billion
in assets under management at the end of March.
Mr. Poon said he sold Treasury securities following the release
of the minutes of the Fed's April policy meeting, reflecting
expectations that the central bank will tighten policy before
September.
The value of net shorts in the eurodollar-futures market,
reflecting expected interest rates on dollars held in banks
overseas at a certain date, reached $730 billion for the week
ending May 24, said Cheng Chen, U.S. rates strategist at TD
Securities, citing data from the Commodity Futures Trading
Commission. That is the largest net short since December 2014.
Eurodollar futures are a popular tool for investors seeking to
hedge against rising rates or to speculate on the path and timing
of Fed policy. As short-term yields rise, the contract price
declines, benefiting those making short bets.
The fed-funds futures market showed on Tuesday that the odds of
a rate increase at the Fed's June meeting were 23%, according to
data from CME Group, down from 34% earlier in May.
The Fed hasn't raised rates unless the market assigned at least
60% odds to such a move via the near-term fed-funds futures
contracts the day before a rate increase, according to Mark Cabana,
U.S. rates strategist at Bank of America Merrill Lynch in New York.
Mr. Cabana used fed-funds futures data back to 1994.
The ripples from the expected rate rise so far have been
limited. Gold for August delivery closed up 0.1% at $1,217.50 a
troy ounce on the Comex division of the New York Mercantile
Exchange.
U.S. stocks have strengthened since the release of the Fed
minutes, trading near their all-time high set in 2015. U.S.
crude-oil prices hover around $50 a barrel, up nearly 90% from
their 2016 low in mid-February.
U.S. government bond yields have risen modestly as investors
shed interest-rate exposure, but yield increases have been largely
limited to short-term debt.
The yield on the benchmark 10-year note closed at 1.834%
Tuesday, only a bit higher than 1.821% at the end of April. Yields
rise as bond prices fall.
Any Fed interest-rate increase is apt to set off market ripples
as investors reposition themselves, said Jeff Greenberg, director
and macro strategist at UBS Securities LLC.
"If there's increasing calm and complacency in markets, then
there's also increasing vulnerability to shocks," he said.
Investors, however, don't expect a big rise in bond yields. The
Bank of America Merrill Lynch MOVE index of options-based Treasury
bond volatility, settled at 66.76 Friday, down from a recent high
of 97.94 on Feb. 11. Rising rates often are welcomed as a sign of
gathering economic strength.
"A rate hike would suggest Fed officials are confident that the
U.S. economy is doing better," said Charles Comiskey, head of
Treasury trading at Bank of Nova Scotia in New York.
Write to Min Zeng at min.zeng@wsj.com
(END) Dow Jones Newswires
May 31, 2016 20:01 ET (00:01 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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