Pimco, BlackRock see December Fed hike amid mini taper tantrum

[SINGAPORE] Pacific Investment Management Co, BlackRock Inc and JP Morgan Asset Management said the Federal Reserve will probably raise interest rates in December and forgo action this week.

The market-implied odds of a move by year-end climbed above 50 per cent Friday after the US reported consumer prices in August rose more than analysts predicted. Before their Sept 20-21 meeting, some Fed officials including Chair Janet Yellen stepped up rhetoric favoring a rate hike, which would be only the second since the authority cut its target to close to zero during the financial crisis of 2008. The Bank of Japan, which also meets on the same days, and the European Central Bank are studying the effectiveness of their own stimulus programs.

Investors have sent bonds down around the world on concern policy makers are contemplating the limits of the unprecedented measures they've used to support their economies. The selloff resembles the so-called taper tantrum that engulfed markets in 2013 as investors fretted the Fed was planning to reduce its asset purchases, according to Joachim Fels, the global economic adviser at Pimco, which manages US$1.51 trillion.

"Investors, I think, are nervous that central banks may start to reconsider unconventional policies," Mr Fels, who is based in Newport Beach, California, said on Bloomberg Television Sept 16. "Investors have been riding and actually surfing the wave of central bank accommodation. Now we're seeing something like a mini taper tantrum," he said, adding the Fed will act in December and inflation will rise toward its 2 per cent target over time.

The benchmark Treasury 10-year note yield was little changed at 1.69 per cent as of 7:07 am in New York, based on data compiled by Bloomberg. The price of the 1.5 per cent security due in August 2026 was 98 9/32. Treasuries opened in London after being closed for a Japan holiday.

Bonds worldwide have fallen 1.6 per cent over the past month, according to the Bloomberg Barclays Global Aggregate Index. The yield from the securities in the index has risen to 1.22 per cent from a record low of 1.07 per cent set in July.

Rick Rieder, BlackRock's New York-based global chief investment officer of fixed income, predicted a Fed move in December in a Bloomberg Television interview Sept 16. BlackRock is the world's largest money manager, overseeing US$4.89 trillion.

Benjamin Mandel, a global strategist in New York for JP Morgan Asset, with US$1.6 trillion under management, made the same call at the end of last week.

Traders see a 20 per cent chance of a rate increase when policy makers meet this week, and about a 55 per cent likelihood by year-end, futures contracts indicate. The calculation is based on the assumption the Fed's target trades at the middle of the new band.

BLOOMBERG