US Yields Rise on Concern That Fed Will Raise Rates

Despite poor employment figures last week, the US bond market is pricing in an interest rate rise during this month's Federal Open Market Committee meeting

Dave Sekera, CFA 13 September, 2016 | 11:53AM

US Treasury bond prices dropped sharply last Friday, sending yields higher as fixed-income investors became more concerned about the increased potential for a rise in the federal funds rate sooner rather than later. In the United States, the market-implied probability that the Federal Reserve will increase the federal funds rate after the Federal Open Market Committee meeting later this month has doubled over the past month; however, even after doubling off a low base, the market is still pricing in only a 24% probability that the Fed will raise the rate this month.

Developed market government bonds sold off last week, sending yields higher

While it is unlikely that the Fed will act in September, the probability of a rate increase in the December meeting rises substantially. As December is the first meeting after the presidential election, the Fed will have a greater sense of freedom to act. The current concern is that if there is a significant market impact on financial assets, the Fed could be accused of influencing the election.

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About Author

Dave Sekera, CFA  is a senior securities analyst with Morningstar.

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