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Fed rate-increase odds at 72% in market

Singapore - The odds the Federal Reserve will raise interest rates at its next meeting in December were at 72%, and Pacific Investment Management says a move is likely.

The probability the central bank will act at its December 15 to December 16 session has increased from about 30% as recently as mid-October, futures contracts show.

The US is scheduled to sell $35bn of five-year notes on Tuesday, after a two-year auction Monday drew the highest yield in five years, reflecting expectations among traders for rising interest rates.

“The baseline view in markets and at Pimco has converged to a very high probability that - at last - the Fed begins the process of liftoff,” Richard Clarida, New York-based global strategic adviser for the company, wrote in a report on Monday.

In February, Clarida correctly predicted the Fed would drop its pledge to be patient on raising rates from its March statement.

The benchmark US 10-year note yield rose two basis points, or 0.02 percentage point, to 2.22% as of 12:24, according to Bloomberg Bond Trader data.

The 2.25% security due in November 2025 rose 5/32, or $1.56 per $1 000 face amount, to 100 1/4. The yield earlier fell as low as 2.21%, the lowest since November 4, after Turkey said it shot down a Russian warplane that entered Turkish airspace.

The rising odds of a Fed shift in the futures market combined with the advance in short-maturity yields reflect a growing consensus among traders that the central bank is about to move.

Minutes published last week showed policy makers crafted their October statement to stress it may be appropriate to act in December. A US rate increase would be the first since 2006.

August high

The odds of a Fed move in December are close to their highest since August, based on the assumption that the effective fed funds rate will average 0.375% after liftoff, compared with the current range of zero to 0.25%.

Monday’s auction of two-year notes drew a yield of 0.948%, the highest since April 2010. In addition to selling five-year debt on Tuesday, the US is scheduled to offer$13bn of two-year floating-rate securities. It will auction $29bn of seven-year notes on Wednesday.

The Commerce Department will increase its estimate of US economic growth in the third quarter to an annualized rate of 2.1% from 1.5% in a report on Tuesday, according to a Bloomberg survey.

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