Bond Dealers Say Futures Traders Are Wrong

Fed funds futures contracts have been indicating a growing sense that the Federal Reserve will raise its interest rate targets by November. By Monday, the futures were showing a 58 per cent probability yesterday of a rate increase.

Interestingly, the primary dealers say the futures traders are nuts. Bloomberg survey the 16 primary dealers and found that they don’t think that rates will rise.


“The market seems wrong on this one,” Eric Liverance, head of derivatives strategy at UBS AG told Bloomberg. UBS predicts that the Fed will remain on hold until June 2010. “High unemployment and a continued bad housing market will prevent the Fed from raising rates.”

Of the 16 primary dealers, none predict a rate hike in 2009, nine say rates will rise in 2010, and six predict no rise until 2011. (One, Cantor Fitzgerald, didn’t respond.)

From Bloomberg:


“I don’t think the Federal Reserve is anywhere close to raising rates,” Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc., another primary dealer, said during a conference in Montreal. “The unusually deep recession of 2007 up to now is likely to be followed by an unusually weak recovery in 2009 and 2010.”

Treasury two-year note yields snapped a three-day advance, falling 10 basis points, or 0.10 percentage point, to 1.31 per cent at 5:03 p.m. in New York. The price of the 0.875 per cent security maturing in May 2011 rose 6/32, or $1.88 per $1,000 face amount, to 99 5/32. The yield had jumped half a percentage point from June 3 through yesterday, reaching the highest level since November.

Fed Fund Futures

Fed-funds futures contracts on the Chicago Board of Trade show a 44 per cent probability the central bank will lift its target rate to at least 0.5 per cent by the Nov. 4 policy meeting. Rate-increase odds were 35 per cent a month ago.

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