FED. Board Member says rate hike not coming anytime soon per Bloomberg radio:
This is what I said last week when rates started climbing, fools are betting against the FED. again and will lose as usual. Never bet against the FED. is a saying for a reason. The sooner you learn it the less you will lose.
Bond Dealers Say Futures Traders’ Rate Bets Wrong (Update4)
By Liz Capo McCormick
June 9 (Bloomberg) -- The Wall Street firms that trade directly with the Federal Reserve say speculators betting that interest rates may head higher this year are wrong.
Policy makers will keep the target for overnight loans between banks in a range of zero to 0.25 percent this year, according a survey of the 16 primary dealers of U.S. government securities that trade with the central bank. A majority predict no increase until at least the second half of 2010.
Yields on two-year Treasury notes surged 44.4 basis points June 5 and 8, the biggest two-day increase since Sept. 18 and 19, and Fed funds futures contracts showed a 58 percent probability yesterday of a rate increase by November on signs that the economy is bottoming. Implied yields on eurodollar futures, also used to speculate on changes in central bank policy, increased even as the U.S. government said on June 5 that the unemployment rate rose to 9.4 percent, the highest since 1984.
“The market seems wrong on this one,” said Eric Liverance, head of derivatives strategy in Stamford, Connecticut, at UBS AG, one of the dealers. UBS predicts that the Fed will remain on hold until June 2010. “High unemployment and a continued bad housing market will prevent the Fed from raising rates.”
Policy makers reduced the target rate to a record low in December after the collapse of the subprime mortgage market froze credit markets and pushed the global economy into the first recession since World War II. President Barack Obama and Fed Chairman Ben S. Bernanke have pledged, committed or spent $12.8 trillion to thaw credit and ramped up government spending to revive economic growth.
“The Fed is not likely to tighten this year or next because it still faces significant headwinds out of the financial and housing sectors,” said Lawrence Dyer, an interest-rate strategist in New York at HSBC Holdings Plc, one of the primary dealers. “Credit is still tight. The market is now better than it was before, but that is a healthy stability. It is not an economic recovery.”
Traders started speculating that central bankers would raise rates this year after the Labor Department said U.S. payrolls fell by 345,000 last month, the least in eight months. That came three days after the National Association of realtors said the number of Americans signing contracts to buy previously owned homes rose 6.7 percent in April, more than forecast and the fourth increase in five months, as lower prices attracted buyers.
‘Unusually Weak Recovery’
The primary dealers are confident that rates won’t rise because the annual rate of economic growth is forecast to hold below 2 percent in the second half of the year. The economy will likely contract 2 percent this quarter, according to the median forecast of 63 economists surveyed by Bloomberg.
“I don’t think the Federal Reserve is anywhere close to raising rates,” Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc., another primary dealer, said during a conference in Montreal. “The unusually deep recession of 2007 up to now is likely to be followed by an unusually weak recovery in 2009 and 2010.”
Treasury two-year note yields snapped a three-day advance, falling 10 basis points, or 0.10 percentage point, to 1.31 percent at 5:03 p.m. in New York. The price of the 0.875 percent security maturing in May 2011 rose 6/32, or $1.88 per $1,000 face amount, to 99 5/32. The yield had jumped half a percentage point from June 3 through yesterday, reaching the highest level since November.
Fed Fund Futures
Fed-funds futures contracts on the Chicago Board of Trade show a 44 percent probability the central bank will lift its target rate to at least 0.5 percent by the Nov. 4 policy meeting. Rate-increase odds were 35 percent a month ago.
The yield on the December 2009 eurodollar contract rose 36 basis points to 1.37 percent on June 5, and climbed to 1.41 percent yesterday. It fell to 1.20 percent today.
“The lesson we’ve learned is these trades go beyond what seems rational,” said Carl Lantz, an interest-rate strategist in New York at Credit Suisse Group AG. “As a trader you have to be a bit humble and recognize you’re not always right.”
Credit Suisse is among the 10 dealers that predict the Fed won’t begin raising rates until 2010. The rest say overnight rates will remain steady until 2011. The central bank last raised borrowing costs in June 2006, when policy makers pushed the rate to 5.25 percent and unemployment was 4.6 percent.
‘Withdraw Too Early’
Dallas Federal Reserve Bank President Richard Fisher said last week that there was “no exact formula” for when to start withdrawing the emergency cash it pumped into the economy.
“We just want to make sure we don’t repeat the mistakes made in the 1930s and mistakes made by the others like the Japanese in the 1990s, and we don’t withdraw too early,” he said in a speech in Lubbock, Texas.
Central bankers are seeking to cap consumer borrowing rates to ensure the economy recovers. As a result of rising yields, though, 30-year fixed-rate mortgages jumped to 5.45 percent at the end of last week from as low as 4.85 percent in April, according to Bankrate.com in North Palm Beach, Florida. The 10- year Treasury yields rose more than a percentage point to 3.87 percent since mid-March.
At the same time, the economy is likely to expand less than 1.85 percent next year, as the unemployment rate holds above 9 percent, according to a survey of economists by Bloomberg. The Fed last raised rates when unemployment was above 9 percent in 1983, according to data compiled by Bloomberg.
While pending home sales rose in April, other housing metrics show the market may not have bottomed. The mortgage delinquency rate jumped to 9.12 percent in the first quarter, and the share of loans entering foreclosure rose to 1.37 percent, the Mortgage Bankers Association said last month. Both figures were the highest in records going back to 1972.
“The economy is still contracting and most forecasters including myself expect that will stop later this year and production will start to pick up but we don’t expect a robust recovery,” said Kevin Logan, senior market economist in New York at Dresdner Kleinwort, another primary dealer. “This is pretty well exaggerated.”
Following are the results of Bloomberg’s survey conducted June 8.
Firm Projected Fed Rate Increases:
2009 2010 2011
BNP Paribas X
Banc of America-Merrill X
Barclays Capital X
Cantor Fitzgerald NA
Credit Suisse X
Daiwa Securities X
Deutsche Bank X
Dresdner Kleinwort X
Goldman Sachs X
HSBC Securities X
Morgan Stanley X
RBS Securities X
To contact the reporter on this story: Liz Capo McCormick in New York at Emccormick7@bloomberg.net Last Updated: June 9, 2009 17:08 EDT