Yellen Prompts Traders to Scale Back Fed Rate Bets to November

Bond traders pushed back bets for when the Federal Reserve will raise interest rates this year after Chair Janet Yellen said the global economy presents heightened risks.

The probability of a move at the Fed’s next meeting in April has dropped to zero, and the odds don’t rise past 50 percent until the November session, futures contracts indicate. The chance of a shift by the end of 2016 has declined to 64 percent, from a 73 percent likelihood as recently as the end of last week.

“The comment was more dovish than I expected,” said Wontark Doh, head of overseas fixed-income investment in Seoul at Samsung Asset Management, which oversees $200 billion. “One or two times is possible, three or four times is not possible. The upside for Treasury yields is limited.”

Yellen revived a rally in Treasuries, with the 10-year note Yield dropping the most in seven weeks on Tuesday. U.S. government securities have returned 3 percent in 2016, headed for the biggest quarterly gain in almost four years, based on Bloomberg World Bond Indexes.

The yield was little changed at 1.81 percent as of 12:41 p.m. in Tokyo on Wednesday, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in February 2026 was 98 11/32. Samsung Asset’s Doh said he sees the yield in a range of 1.70 percent to 2.10 percent for the remainder of 2016.

China Concern

China’s slowing expansion and declining oil prices are risks to the U.S. economy, Yellen said in her speech Tuesday in New York. It’s appropriate for the Fed to “proceed cautiously” in raising interest rates, she said.

The Fed increased its benchmark from near zero in December as the world’s biggest economy showed signs of gathering momentum. Policy makers left the target rate in a range of 0.25 percent to 0.5 percent at meetings in January and March.

San Francisco Fed Bank President John Williams said central bank policies have pushed long-term Treasury yields to "very low" levels, speaking in Singapore prior to Yellen’s appearance. The threat of a “pretty big correction” in the bond market supports the argument for gradual moves from the Fed, he said.

“What happens if some day some event causes markets to reassess -- 10-year Treasuries are too low -- and move back to something of a more normal level?” Williams said. “That could be disruptive. I do think that there’s going to be over the next few years a movement of long-term yields back up to more normal levels.”

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net. To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net, Nicholas Reynolds, Naoto Hosoda

By: Wes Goodman

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