Investors see higher yields as U.S. jobs data resets Fed calculus

Wed Mar 11, 2015 3:35am EDT
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By Richard Leong

NEW YORK (Reuters) - Before last Friday, many investors opined that the U.S. Federal Reserve would probably raise interest rates only once this year. Making the first hike in about nine years would be almost symbolic, as if the central bank was showing it still knew how.

Fewer investors are talking symbolism now after an unexpectedly strong February jobs report indicated the economy may be picking up steam. Dramatic moves in the bond market, along with gains in the U.S. dollar, show that more investors are positioning for a series of rate increases in 2015, rather than a token move.

Friday saw short-dated bond yields see their biggest gains in a month as more buysiders started to come in line with the thinking of big brokerages who see the Fed raising rates multiple times in the second half of 2015. And long-term rates rose even further, with the 10-year yield posting its biggest move in more than a year.

Prior to the jobs data, many investors had priced in the timing of the first rate increase for late this year, with some still thinking a move might not happen at all in 2015.

"It really drives home how much of a recovery we've seen," said Kristina Hooper, head of portfolio strategies at Allianz Global Investors in New York, which manages $499 billion. "It has changed market sentiment."

The spike in yields has led some investors to become reticent to own too many Treasuries and to consider holding riskier and higher-yielding bonds.

Speculators taking short positions against the benchmark 10-year TYv1 in the futures markets are likely to boost those bets, which were at a seven-week high prior to the jobs report. Bank of America Merrill Lynch analysts said on Monday it might be the most profitable time ever to bet on short-dated U.S. rates to spike higher.

To be sure, evidence of weakening U.S. growth or another flare-up between Greece and its European creditors could cause investors to rethink whether Fed chair Janet Yellen and other top Fed policy-makers will soon hike rates. Some economists including Lawrence Summers point to scant evidence of inflation, particularly in wages, and have urged the Fed to not raise rates "until it sees the whites of inflation's eyes."   Continued...

A tour bus passes the United States Federal Reserve Board building (rear) in Washington October 28, 2014.REUTERS/Gary Cameron