Analysts spent early November warning a Trump victory in the U.S. presidential election would make the Federal Reserve less likely to raise interest rates. What happened instead is that it made a December increase almost a certainty, Bloomberg has reported.
Traders assign about a 94% probability, the highest level this year, to a Fed boost at its final meeting for the year on December 13-14, futures contracts indicate. Trump`s spending plans are driving speculation the Fed will pick up its pace of rate increases as inflation expectations climb, Bloomberg wrote.
”It`s hard not to think this is incredibly reflationary for the global economy,” said Mark Nash, the head of global bonds in London at Old Mutual Global Investors, which oversees about $37 billion. ”We believe there should be more hikes priced in and bond yields should rise,” he said Tuesday in an interview on Bloomberg Television.
Treasury 10-year note yields rose four basis points, or 0.04 percentage point, at 2.26% as of 08:08 in London, according to Bloomberg Bond Trader data. The price of the 2% security due in November 2026 dropped 11/32, or $3.44 per $1,000 face amount, to 97 22/32. The yield climbed to 2.3% Monday, the highest this year. The next target is 2.5%, Nash said.
The odds of a Fed move by December have risen from 68% at the start of November as inflation expectations surged.
Trump`s election helped drive a bond-market rout that has pushed Bank of America Corp.`s Global Broad Market Index down 1.5% in November, heading for the biggest monthly decline since May 2013.
A gauge of expectations for U.S. consumer prices this week climbed to the highest level since April 2015. The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities climbed to 1.97 percentage points on Monday, the highest this year.
Fed`s Measure
An inflation gauge monitored by the Fed, the price index for personal consumption expenditures, rose to an annual rate of 1.2% in September. The central bank`s target is 2%.
Prices for goods imported into the U.S. fell in October from a year before, government data showed Tuesday. The producer price index increased 1.2% from 12 months earlier, which would be the fastest pace in almost two years, based on a Bloomberg survey of economists before the report Wednesday.
”The outlook for U.S. growth is probably a bit firmer for both 2017 and beyond,” said Su-Lin Ong, an economic and fixed-income strategist at Royal Bank of Canada in Sydney. ”Markets have then stepped up to pretty much fully pricing a December move, although we do need to see greater clarity from Trump and his new administration.”
