Yellen spurs traders to push back bets for rate hike

Singapore - Bond traders pushed back bets for when the Federal Reserve will raise interest rates this year after Chair Janet Yellen said the global economy presents heightened risks.

The probability of a move at the Fed’s next meeting in April has dropped to zero, and the odds don’t rise past 50% until the November session, futures contracts indicate. The chance of a shift by the end of 2016 has declined to 64%, from a 73% likelihood at the end of last week.

“The comment was more dovish than I expected,” said Wontark Doh, head of overseas fixed-income investment in Seoul at Samsung Asset Management, which oversees $200bn. “One or two times is possible, three or four times is not possible. The upside for Treasury yields is limited.”

Yellen revived a rally in Treasuries, with the 10-year note yield dropping the most in seven weeks on Tuesday. US government securities have returned 3% in 2016, headed for the biggest quarterly gain in almost four years, based on Bloomberg World Bond Indexes.

The yield was little changed at 1.81% as of 07:41 on Wednesday, according to Bloomberg Bond Trader data. The price of the 1.625% security due in February 2026 was 98 11/32. Samsung Asset’s Doh said he sees the yield in a range of 1.70% to 2.10% for the remainder of 2016.

China concern

China’s slowing expansion and declining oil prices are risks to the US economy, Yellen said in her speech on Tuesday in New York. It’s appropriate for the Fed to “proceed cautiously” in raising interest rates, she said.

The Fed increased its benchmark from near zero in December as the world’s biggest economy showed signs of gathering momentum. Policy makers left the target rate in a range of 0.25% to 0.5% at meetings in January and March.

San Francisco Fed Bank President John Williams said central bank policies have pushed long-term Treasury yields to "very low" levels, speaking in Singapore prior to Yellen’s appearance. The threat of a “pretty big correction” in the bond market supports the argument for gradual moves from the Fed, he said.

“What happens if some day some event causes markets to reassess - 10-year Treasuries are too low - and move back to something of a more normal level?” Williams said. “That could be disruptive. I do think that there’s going to be over the next few years a movement of long-term yields back up to more normal levels.”