Bond traders are showing their doubts about the possibility of an interest-rate hike by the US Federal Reserve this month after a report showed that US service industries expanded at the slowest pace in six years.
Treasuries yields on Tuesday fell across maturities as the data came in below the most pessimistic projection in a Bloomberg survey.
The result jolted the bond market from a state of limbo after a lukewarm reading on last month’s payrolls, released on Friday last week, gave no clear signal on the timing of a rate increase.
The market-implied probability of a rate boost at the Federal Open Market Committee’s (FOMC) meeting on Sept. 20 and Sept. 21 slumped to 24 percent, the lowest since Aug. 22. The calculation assumes the effective Fed funds rate will trade at the middle of the new target range after any increase.
Federal Reserve Bank of San Francisco President John Williams said that the central bank might raise rates at any of its meetings.
Coming after data last week showed a surprise contraction in manufacturing, the latest report led traders to roll back bets on a hike this month just as a slew of Fed officials are set to sound off.
“This just confirms the suspicion that as much as the Fed may want to hike this year, the data has to be there,” said David Tulk, head of global macro strategy in Toronto at Toronto-Dominion Bank, which forecasts no rate hike this year.
“If the data continues to soften heading into the FOMC meeting, expectations will be pared back and Treasuries will continue to rally.”
The yield on the two-year Treasury note, the coupon maturity most sensitive to Fed policy expectations, on Tuesday fell 6 basis points, or 0.06 percentage points, to 0.73 percent.
The economy is “in good shape and headed in the right direction,” Williams said in the text of a speech in Reno, Nevada.
“Every meeting is live, we want to have a serious discussion,” Williams told reporters when asked if this month is on the table.
The path for US interest rates is flatter than he thought a year ago, he said.
Williams does not vote on monetary policy this year.
In the lead-up to last week’s labor report, Fed Chair Janet Yellen had revived bets on a hike this month in an Aug. 26 speech in Jackson Hole, Wyoming, where she said that the case for raising rates this year had strengthened.
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