Traders have never been more convinced of a September rate hike by the Federal Reserve.

The chances of an interest-rate increase next month reached 52 percent Wednesday, up from just 38 percent just two days earlier. What fueled the change of heart? Hawkish comments from Fed Bank of Atlanta President Dennis Lockhart on Tuesday and a surprisingly strong report on U.S. service-sector growth Wednesday.

“I’m more convinced that they’re going to raise in September,” said Christopher Sullivan, who oversees $2.4 billion as chief investment officer at United Nations Federal Credit Union in New York. “The market has come around to that view, by a slim majority.” 

That’s helped drive bond yields higher before the week’s main event, Friday’s monthly report on unemployment and wages from the Labor Department. Fed officials have said that they will need signs of some further improvement in the jobs market before they raise rates.

Benchmark 10-year Treasury yields rose five basis points to 2.27 percent Wednesday.

The Fed has held its target for the federal funds rate at virtually zero since December 2008 to bolster economic growth. The likelihood of a Fed increase is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase. 

 

Bloomberg

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