Bond traders are becoming more certain the Federal Reserve will raise interest rates next month as economists say a U.S. jobs report Friday will show enough improvement to justify such a move.
The chance of a rate increase at the Fed’s December meeting rose to 78 percent, the highest since March and up from 69 percent at the end of last week, futures contracts indicate. The report will show employers added 173,000 workers in October, versus 156,000 in September, according to a Bloomberg survey of economists. Even so, Treasuries rose as investors sought relatively safe assets in the run-up to next week’s U.S. election.
“A combination of better data, both on the growth and inflation front, and comments from the Fed bolstered a market view that a December rate increase is likely,” said Mohit Kumar, head of interest-rates strategy at Credit Agricole SA’s corporate- and investment-banking unit in London. “But a lot is already in the price, and there’s still ample liquidity in the system, which means enough buyers of long-dated bonds. U.S. elections also have an impact.”
The benchmark U.S. 10-year note yield dropped two basis points, or 0.02 percentage point, to 1.79 percent as of 6:33 a.m. in New York, based on Bloomberg Bond Trader data. The 1.5 percent security due in August 2026 rose 5/32, or $1.56 per $1,000 face amount, to 97-12/32.
Yields will fall to 1.73 percent by Dec. 31 and then climb to 2.11 percent by the end of 2017, based on a Bloomberg survey of economists, with the most recent forecasts given the heaviest weightings. The Bloomberg Barclays U.S. Treasury Index has risen 0.3 percent this week.
Fed officials meeting this week said they would wait for “some further evidence of continued progress” in the economy amid “solid” job gains.
The non-farm payrolls figures should confirm the “trend of broad-based job gains consistent with an ever-improving and healing labor market” and keep the Fed on course, said Emanuella Enenajor, an economist at Bank of America Corp. in New York.
Fed Chair Janet Yellen appears to be more inclined to let the economy run a little hot than to increase rates quickly, Tom Porcelli, the chief U.S. economist at RBC Capital Markets LLC in New York, said Thursday on Bloomberg Television. “We should be much more focused on how many more hikes does this Fed have left,” he said. “There’s only a handful more.”
The firm is one of the 23 primary dealers that deal directly with the U.S. central bank.