“The trade-off between the timing and the size of the Fed normalization explains the reluctance in the U.S. Treasury markets“, Ipek Ozkardeskaya, market analyst at London Capital Group, said in a note.
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Meanwhile, U.S. stocks opened slightly higher, as Wall Street prepared for another busy day of earnings reports, with dozens of U.S. companies reporting quarterly numbers, while oil futures lost ground, seeing renewed pressure. The yield on the two-year note gained 1.1 basis point to 0.704% and the yield on the 30-year bond added 1.3 basis point to 2.976%.
“I think the markets are prepared for a rate hike since the Fed has been pretty transparent about its intent”, says Bill Hornbarger, chief investment strategist at Moneta Group.
In the latest Reuters poll of primary dealers, the banks authorized to transact directly with the Fed, 16 out of 20 said they expected the policy makers to vote for lifting interest rates off a zero rate policy in September.
Yet Yellen has left little doubt that the Fed is preparing to raise short-term rates by year’s end from the near-zero lows it set at the depths of the 2008 financial crisis.
The Fed removed forward guidance in recent months and has become entirely data dependent.
An economic contraction in the first quarter also has been set aside as an aberration, the result of a harsh winter and statistical “noise” that federal number crunchers are now trying to fix. Inflation also remains below the Fed’s target rate.
This chart shows how rates have progressed over the year. It recovered about a third of that before plunging again by more than 8 percent on Monday.
In mid-morning New York trade, the benchmark 10-year U.S. Treasury is trading down 11/32 of a point in price, lifting the yield, which moves in the opposite direction, up to 2.29 percent. The Dow Jones Industrial Average is down 1.9 percent in that period, giving up its gains for the year. Though economists predict 7 percent growth in 2015, fears of a slowdown in China have helped push down the Bloomberg Commodity Index by nearly 8 percent since Fed officials last met in June. Due to the lower demand in Asia as well, even gold fundamentals do not pose an optimistic outlook for the next couple of months.
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However, Piegza argued that if the Fed did in fact intend to raise rates in September, the July statement would be noticeably Hawkish, opening the door for liftoff just seven weeks later. The yield curve at its short end tends to be pretty sensitive to speak of higher interest rates.
