September or not, market says Fed's one-and-done until late

[NEW YORK] Bill Gross says if the Federal Reserve raises interest rates in September, policy makers are increasingly likely to wait at least six months before a second hike. Market measures indicate the wait may be twice that long.

Money market derivatives indicate the federal funds rate will average 0.60 per cent one year from now. The rate would have to exceed about 0.625 per cent to indicate two quarter-point increases, assuming the funds rate will trade close to the middle of the official band. The Fed has held its target for the rate in a zero-to 0.25 per cent range since December 2008. "One-and-done, or more so one-and-done for a little while, is pretty much getting to be a consensus call, given all that is happening around us," said Stanley Sun, a New York-based strategist at Nomura Holdings Inc, one of 22 primary dealers that trade with the Fed. "The market is pricing a very, very gradual Fed hiking pace." Benchmark 10-year Treasury note yields were little changed at 2.17 per cent as of 10:58 am in Tokyo,according to Bloomberg Bond Trader data. The price of the 2 percent security due in August 2025 was 98 15/32.

In June, Fed officials reduced their median estimate for the fed funds rate at the end of 2016 to 1.625 per cent, from 1.875 per cent in March. They will give revised estimates after the policy meeting Sept 16-17.

The odds of an increase in September have fallen to 32 per cent from 40 per cent at the end of July, according to futures data compiled by Bloomberg. October's probability is 43 per cent and December's is 58 per cent.

The Fed "seems intent on raising" its benchmark rate "if only to prove that they can begin the journey to 'normalisation,'" Mr Gross wrote in an investment outlook Wednesday for Denver-based Janus Capital Group Inc. "They should, but their September meeting language must be so careful, that 'one and done' represents an increasing possibility - at least for the next six months." The other factor driving financial markets has been China, with the central bank buying yuan and selling dollar assets to support the exchange rate since the nation unexpectedly devalued the currency last month.

Goldman Sachs Group Inc says investors shouldn't expect China's sale of US government debt to drive yields higher, at least not right away.

With the world's second-biggest economy slowing and global markets in turmoil, China's reduction of Treasuries is partly offset by investors parking cash in fixed-income assets, Francesco Garzarelli, the co-head of macro and markets research at Goldman Sachs in London, wrote in a report Wednesday.

China, with US$1.27 trillion of Treasuries as of June, was the biggest overseas holder.

BLOOMBERG