Bond Traders Uncover Secret to Rates That Fed Just Doesn’t Get

26-May (Bloomberg) — Forget 2015. The real play for bond traders is 2016.

For years, the $12.6 trillion U.S. Treasury market has signaled — correctly — that the Federal Reserve was too optimistic in its outlook for the economy and interest rates.

That’s no different now even though policy makers have moved closer to how traders view the world, which is to say that it wouldn’t be surprising if the central bank failed to lift borrowing costs this year.

Despite the backup in yields in recent weeks, bond prices still signal the unexpected slowdown in the economy was more than just the result of some bad weather that kept Americans indoors and idled factories in the first quarter. Regardless of when the first increase comes, futures show traders don’t see rates exceeding 1 percent by the end of 2016, versus the Fed’s estimate of 1.875 percent.

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