Fed rate odds rise to 74% in bond market as Pimco sees liftoff

[SINGAPORE] The odds the Federal Reserve will raise interest rates at its next meeting in December climbed to 74 per cent, and Pacific Investment Management says a move is likely.

The probability the central bank will act at its Dec 15-16 session increased from less than 30 per cent as recently as mid-October, futures contracts show. The US is scheduled to sell US$35 billion of five-year notes Tuesday, after a two-year auction Monday drew the highest yield in five years, reflecting expectations among traders for rising interest rates.

"The baseline view in markets and at Pimco has converged to a very high probability that - at last - the Fed begins the process of liftoff," Richard Clarida, New York-based global strategic adviser for the company, wrote in a report Monday. In February, Clarida correctly predicted the Fed would drop its pledge to be patient on raising rates from its March statement.

The US 10-year note yield was little changed at 2.25 per cent as of 2:20 pm in Tokyo, according to Bloomberg Bond Trader data. The price of the 2.25 per cent security due in November 2025 was 100 1/32.

The rising odds of a Fed shift in the futures market combined with the advance in short-maturity yields reflect a growing consensus among traders that the central bank is about to move. Minutes published last week showed policy makers crafted their October statement to stress it may be appropriate to act in December. A US rate increase would be the first since 2006.

The odds of a Fed move in December are the highest since August and are based on the assumption that the effective fed funds rate will average 0.375 per cent after liftoff, compared with the current range of zero to 0.25 per cent.

Monday's auction of two-year notes drew a yield of 0.948 per cent, the highest since April 2010. In addition to selling five-year debt on Tuesday, the US is scheduled to sell S$13 billion of two-year floating-rate securities. It will offer S$29 billion of seven-year notes Wednesday.

The Commerce Department will increase its estimate of US economic growth in the third quarter to an annual rate of 2.1 per cent from 1.5 per cent in a report Tuesday, according to a Bloomberg survey.

BLOOMBERG