Pimco’s Bill Gross, often called the Bond King, has taken issue with a lot of the recent bearish sentiment in the bond market. Given his expectations that the Federal Reserve is likely to keep its fed funds rate low well into the future – until at least 2016 by Pimco’s projections – bond yields aren’t likely to rise much from current levels, Pimco strategists have said. Thus, Gross’s apparent bafflement that the market has priced in a 4% Fed funds rate in 2018 appears to be in line with his current thinking.
The fed funds rate is the rate at which depository institutions lend to each other overnight, but it has a broader impact on monetary policy and the economy. The Fed has committed itself to keeping this rate low until the economy meets certain target levels on unemployment and inflation — it currently targets a rate of between zero and 0.25%. Futures contracts serve as one indicator of when the market expects the Fed to start tightening monetary policy.
At present, there are no fed fund futures contracts listed beyond August 2016, so it’s hard to know where Gross got the 4% figure from (he didn’t return our request for comment). But eurodollar futures contracts, which project the interest rate for dollar deposits outside the U.S., serve as one approximation of the fed funds rate. The June 2018 eurodollar futures contract EDM8 -0.01% had an implied interest rate of 3.985% on Tuesday, according to FactSet. That nearly matches Gross’s 4%.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.