Just six months ago, money market traders expected the Federal Reserve to raise interest rates by the end of 2013. Now, they see borrowing costs staying at record lows for about three more years as the economic outlook worsens.
Bond market measures from overnight index swaps, which indicate no increase in the federal funds rate until mid-2015, to a 62 percent decline in a measure of volatility in government bonds signal that rates will stay near zero for longer. The gap between two- and five-year Treasury yields, which decreases when traders expect benchmark rates to remain subdued, is more than 50 percent narrower than its average since 2008.
“They do stand ready for more policy accommodation and that will likely take the form of an expansion of the balance sheet in longer-dated Treasuries or mortgages,” Jeffrey Rosenberg, chief investment strategist for fixed income at BlackRock Inc. in New York, which has $3.5 trillion under management, said in a telephone interview on Sept. 7. He anticipates the Fed will provide more guidance on the timing of rate policy first.
Bond strategists and economists have reduced their yield forecasts. The median of more than 70 estimates in a Bloomberg survey published Aug. 9 found that they see 10-year yields ending this year at 1.65 percent and 2.38 percent in 2013. In the prior monthly poll they saw 1.9 percent and 2.7 percent.
Republicans unhappy with Bernanke’s stimulus actions called for an audit of the Fed in their 2012 platform adopted in Tampa Aug. 28. Senator Bob Corker of Tennessee said in a press release Sept. 6 that an “unhealthy obsession” with monetary policy is distracting the public from the need for fiscal reform.
U.S. GDP will expand 2.2 percent this year and 2.1 percent in 2013 according to median forecasts compiled by Bloomberg. Morgan Stanley cut its 2012 global growth forecast to 3.2 percent from 3.7 percent according to an Aug. 15 report, and the ECB on Sept. 6 said euro area output will contract 0.4 percent this year, worse than the 0.1 percent it had predicted three months earlier.