Prices gain as Fed minutes show Dec rate hike likely

23 Nov, 2017

Many Fed policymakers expect that interest rates will have to be raised in the "near term," according to the record from the Oct. 31-Nov. 1 meeting, at which the Fed kept rates unchanged.

"December is basically baked in the cake," said Justin Lederer, an interest rate strategist at Cantor Fitzgerald in New York. "After that you just have to keep watching the inflation data."

Benchmark 10-year notes gained 10/32 in price to yield 2.32 percent, down from 2.36 percent on Tuesday.

Interest rate futures traders are pricing in a 92 percent chance of a December rate hike, according to the CME Group's FedWatch Tool.

The yield curve between two-year notes and 10-year notes held near 10-year lows at 58.5 basis points, after falling to 57.4 basis points on Tuesday, the flattest level since late 2007.

Recent flattening in the Treasury yield curve reflects concerns about long-term growth and inflation even as the US central bank continues its path towards normalizing monetary policy.

"Inflation is not playing along with the pace of normalization," said Lou Brien, a market strategist at DRW Trading in Chicago.

"The confidence that the market is putting on a rate hike, with the PCE core at levels that are as low as they've been in a couple of years, means that the yield curve should flatten," Brien added.

The core personal consumption expenditures (PCE) price index has consistently undershot the Fed's 2 percent target for more than five years.

Many of the Fed officials said in the meeting minutes that the jobless rate appeared to be too low for inflation to remain at its current weak level.

Yields briefly fell earlier on Wednesday after data showed that new orders for key US-made capital goods unexpectedly fell in October after three straight months of hefty gains, but a sustained increase in shipments pointed to strong momentum in the economy as the year winds down.

The Treasury Department said on Wednesday it will sell $88 billion in short- and intermediate-dated supply next week, including $26 billion in two-year notes, $34 billion in five-year notes and $28 billion in seven-year notes.

 

Copyright Reuters, 2017

Read Comments