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Fed Rate-Increase Odds Drop Below 10% for October, Futures Show

(Bloomberg) — The bond market shows traders see only an 8 percent chance the Federal Reserve will raise interest rates at its Oct. 27-28 meeting following weaker-than-expected employment growth.

Treasury 10-year notes ended five days of gains Monday as stocks advanced. The yield climbed from the lowest level in almost six weeks reached on Oct. 2. Mohamed A. El-Erian said the odds of a Fed liftoff are 50 percent for the following session Dec. 15-16, while analysts at Societe Generale SA said Federal Open Market Committee officials won’t move until March.

Data due Monday will show growth in services slowed this month, based on a Bloomberg survey of economists. The U.S. added 142,000 jobs in September, versus 201,000 that analysts predicted, a Labor Department report at the end of last week showed.

 “It takes October off the table, but I don’t think it takes December off the table,” El-Erian, a Bloomberg View columnist and the chief economic adviser at Allianz SE, said in an interview with Bloomberg following the jobs report.

Benchmark Treasury 10-year note yields rose two basis points, or 0.02 percentage point, to 2.02 percent as of 8 a.m. New York time, according to Bloomberg Bond Trader data. The 2 percent security due in August 2025 fell 6/32, or $1.88 cents per $1,000 face amount, to 99 7/8.

Stocks Climb

The Stoxx Europe 600 Index of shares rose a second day while U.S. equity-index futures also gained.

The U.S. 10-year yield dropped as low as 1.90 percent on Oct. 2, the least since Aug. 24 and approaching the lowest level since April. Treasuries returned 1 percent last week, the steepest gain in six months, based on Bloomberg World Bond Indexes.

Traders have been pushing back forecasts for the move, highlighting the lack of consensus over when officials will shift policy.

Boston Fed President Eric Rosengren said Oct. 3 the U.S. economy needs to be growing at a 2 percent pace in the second half of the year to justify an interest-rate increase by December.

“The bias remains for lower yields, while waiting for the next pieces of relevant macro data,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. The comments from Rosengren “contain no clear signal for 2015 liftoff, either. I’d say the October FOMC is no longer a ‘live meeting.’ It’s hard to see any single data report until then potentially shifting the odds in favor of a hike at that meeting.”

The yield on the Bloomberg Global Developed Sovereign Bond Index fell below 1 percent last week to 0.97 percent, the lowest level since April.

The Institute for Supply Management’s non-manufacturing index fell to 57.5 in September from 59 in August, based on a Bloomberg survey of economists before the data are released Monday.

Markets are now pricing in the Fed to raise rates in March with two increases in each of the next two years, according to SocGen strategists, led by Vincent Chaigneau, London-based head of fixed-income and currency strategy.

“We expect rates to continue to trade in a range,” the analysts wrote. “Hence we maintain our neutral stance on Treasury rates as we revert back to global data dependence mode.”

Fed Outlook

The odds of a Fed rate increase were about 34 percent by the December meeting, 42 percent by the January session and 55 percent by March, according to futures data compiled by Bloomberg. The odds for a boost by the October meeting were 18 percent on Oct. 1. The calculations are based on the assumption that the effective fed funds rate will average 0.375 percent after liftoff, versus the current target range of zero to 0.25 percent.

The central bank needs to amend the way traders view the path for interest rates, El-Erian said.

“The critical issue for the Fed is not when it moves first; it is the journey,” he said. Between now and December, it has to get the market to realize “that this will be the loosest tightening in the modern history of central banks,” El-Erian said.


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