Bond Traders Begin To Price Out A September Fed Hike

So much for September.

Traders gearing up for the Federal Reserve to raise interest-rates next month reversed course Wednesday after minutes from the central bank’s July meeting showed policy makers were still waffling on whether the economy is strong enough to warrant higher borrowing costs.

That’s far short of the confidence they expected to see from a central bank supposedly just weeks away from what would be the first increase in almost a decade.

The probability that futures traders assign to a rate boost next month slid to 36 percent, the lowest since July, from about 50 percent earlier in the day. The levels assume that the Fed’s target will average 0.375 percent after the first move. The chance of an increase at or before the Fed’s December meeting dropped as well, to 65 percent from 73 percent Tuesday.

Declining energy prices and a strengthening dollar have weighed on bond-market inflation forecasts. So the news that officials had discussed persistently low inflation led traders to exit bets that the central bank was set to start raising interest rates. Before Wednesday, investors were betting that long-term Treasuries, which are sensitive to inflation, would outperform shorter maturities, which are more vulnerable to changes in Fed policy.

“Their stance on inflation has changed,” said George Goncalves, head of interest-rate strategy in New York at Nomura Holdings Inc., one of 22 primary dealers that trade with the Fed. “It’s starting to feel like they’re not going to go in September.”


Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell