December Fed rate-hike odds slide below 70% on FBI Clinton probe

[NEW YORK] Bond traders pared wagers on tighter US monetary policy after the Federal Bureau of Investigation said it's reopening its inquiry into Hillary Clinton's use of private e-mail while secretary of state.

Treasury two-year notes gained for the first time in seven days as futures data show traders see less than a 70 per cent probability of a Federal Reserve interest-rate hike by December, down from a 74 per cent chance seen earlier Friday.

The calculations assume that the effective fed funds rate will average 0.625 per cent after the next increase. The FBI's announcement comes 11 days before the US presidential election.

"This is a small glimpse into what the bond market thinks is going to happen if Trump is elected," said Thomas Roth, senior Treasury trader in New York at MUFG Securities Americas Inc.

"The market has made it clear that they think a Trump victory would be bad for stocks and would create more uncertainty in the economy. And therefore, it might hold the Fed off from raising rates."

The development brought political risk back to the fore after signs of economic growth in the US and abroad had pushed traders to shift their focus to global central-bank policy, driving Treasuries to a 1.2 per cent loss this month.

A report on Friday showed the US economy grew in the third quarter at the fastest pace in two years, bolstering the Fed's case to tighten this year.

Yields on US two-year notes, the coupon maturity most sensitive to Fed policy expectations, fell three basis points, or 0.03 percentage point, to 0.85 per cent as of 5pm in New York, according to Bloomberg Bond Trader data.

The price of the 0.75 per cent security due in Oct 2018 rose 2/32, or US$0.63 per US$1,000 face amount, to 99 25/32.

"Hillary is looked at as being the known commodity and Trump is considered to be the wild card, so from that standpoint it makes people less willing to take risks" if her lead slips, said Ward McCarthy, chief financial economist at Jefferies LLC, one of 23 primary dealers that trade with the Fed.

BLOOMBERG