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Fed odds drop to 8% for October; El-Erian says December is 50-50

[SINGAPORE] The bond market shows traders see only an eight per cent chance the Federal Reserve will raise interest rates at its Oct 27-28 meeting following weaker-than-expected employment growth.

Mohamed A El-Erian says the odds are 50 per cent for the next session Dec 15-16. US 10-year yields were below two per cent as investors pushed back forecasts for the move, highlighting the lack of consensus over when officials will shift policy. Data Monday will show growth in services slowed, based on a Bloomberg survey of economists. The US added 142,000 jobs in September, versus 201,000 that analysts predicted, Friday's employment report showed.

"It takes October off the table, but I don't think it takes December off the table," Mr El-Erian said in an interview with Bloomberg following the jobs report.

US 10-year Treasury yields fell one basis point to 1.98 per cent as of 7:06 a.m. Monday in London, according to Bloomberg Bond Trader data. The price of the two per cent security due in August 2025 rose 3/32, or 94 US cents per US$1,000 face amount, to 100 5/32.

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The yield dropped as low as 1.90 per cent on Oct 2, approaching the lowest level since April. Treasuries rose 1 per cent last week, the steepest gain in six months, based on Bloomberg World Bond Indexes.

Hideaki Kuriki, who buys Treasuries for Sumitomo Mitsui Trust Asset Management in Tokyo, said 10-year Treasury yields pushed below his 2 per cent target. Now they may fall to 1.90 per cent, he said.

"There's a downside risk," he said. "I didn't think nonfarm payrolls would be weak, so that's a surprise." The yield on the Bloomberg Global Developed Sovereign Bond Index fell below 1 per cent last week to 0.97 per cent, the lowest level since April.

"Global long-term interest rates are coming down because nonfarm payrolls were unexpectedly lower," said Toshifumi Sugimoto, the chief investment officer at Capital Asset Management in Tokyo.

The Institute for Supply Management's non-manufacturing index fell to 57.5 in September from 59 in August, based on a Bloomberg survey.

The odds of a Fed rate increase were about 34 per cent for the December meeting, 40 per cent for the January session and 55 per cent for the Marchgathering. The calculation is based on the assumption that the effective fed funds rate will average 0.375 per cent after liftoff, versus the current target range of zero to 0.25 per cent.

The central bank needs to amend the way traders view the path for interest rates, said Mr El-Erian, who's a Bloomberg View columnist andthe chief economic adviser at Allianz SE.

"The critical issue for the Fed is not when it moves first;it is the journey," he said. Between now and December, it has to get the market to realize "that this will be the loosest tightening in the modern history of central banks," he said.