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Bonds: December Fed rate hike a close call, some analysts say

  • By ShareCast

(ShareCast News) – These were the movements in some of the most widely-followed 10-year sovereign bond yields:
US: 1.77% (+1bp)

UK: 1.04% (+6bp)
Germany: 0.07% (+4bp)
France: 0.36% (+4bp)
Spain: 1.06% (+2bp)
Italy: 1.42% (+4bp)
Portugal: 3.40% (+3bp)
Greece: 8.31% (+4bp)
Japan: -0.06% (-1bp)

Yields on benchmark 10-year Gilts pushed higher along with those on debt from other European sovereigns as traders waited on the release of the minutes of the US central bank’s last policy meeting on 21 September.

In the event, those minutes revealed a still divided group of policymakers, although several of those who opted to stay put believed it had been a “close call” while “some” believed it would be appropriate to tighten “relatively soon” if the jobs market and the economy continued to strengthen.

Most economists appeared to think the minutes had offered little fresh news for investors and stuck by previous calls for the next tightening move to come in December, although some doubts were evident.

For Michael Gapen at Barclays Research: “Our base case remains for a December rate increase, but the FOMC minutes reveal widespread discord within the committee on a variety of issues. These divisions, plus the tendency of the incoming data to be positive, but with blemishes, means a rate hike in December is not a done deal by any means.”

“We do not change our Fed call based on these – for now we stick to our non-consensus view that the Fed will stay on hold for the rest of the year, although it is a close call whether the Fed will hike or not in December.

“The reason for our call is that the Fed seems too optimistic on Q3 GDP growth and we fear that economic data may continue to disappoint in the short-term. Incoming data will be important for the Fed’s decision to hike or not later this year,” analysts at Danske Bank said.

“Minutes from the September FOMC confirm our view that policymakers are likely to judge recent readings from the US economy as more than adequate to justify a rate hike in December. The subsequent pace of rate hikes is likely to be slower than Fed “dots” given the view that slack remains in the labor market and participants’ downward reassessment of the neutral rate of interest,” chipped in Andrew Hollenhorst at Citi.