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Fed Rates To 5.5% This Year?

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Bring it on:


NEW YORK (MarketWatch) -- Treasury prices fell Friday morning, sending yields higher, amid worries that interest rates in the U.S., Japan and the euro zone could all move higher at the same time.

The benchmark 10-year Treasury note last was down 12/32 at 98-19/32 with a yield of 4.679%, up from 4.637% in late trade Thursday.

Overnight Japanese consumer-price data was higher than expected. The report intensified speculation that the Bank of Japan could back away from its quantitative easing policy sooner rather than later. The central bank meets next week.

"Whether the Bank of Japan policy board will lift quantitative easing on March 9 is a close call, but we now see a slightly better than even chance for it, given relatively subdued protests against such a move from the government," said analysts from Banc of America Securities.

On Thursday the European Central Bank lifted its key rate and Jean-Claude Trichet, the central bank's president, make hawkish remarks that were seen as suggesting more rates are in store in the euro zone.

In addition, a number of recent strong U.S. data reports have left many investors convinced the Federal Reserve will continue lifting rates.

A stronger than expected report from the Institute of Supply Management on the services sector Friday further reinforced the view that the Fed will need to keep lifting rates. The index's reading for February was 60.1%, up from 56.8% in January. MarketWatch had projected a reading of 58.2%.

The Fed funds target now stands at 4.5%. The market has priced in at least one more quarter point hike to 4.75% and many investors expect a second increase to 5% by the end of the first half.

However, Lehman Brothers economists Friday forecast that overnight rates will increase four more times by late summer and push the target up to 5.5%.

Previously, Lehman was expecting the Fed to stop raising rates when it got to 5%., but it changed the forecast because the housing market is not cooling as quickly as expected and the economy remains strong.

Brant Carter, managing director of fixed income at Morgan Keegan, said it appears the market is driving U.S. yields upward because international investors will demand higher rates to keep buying U.S. instruments.

The prospect of simultaneous economic strengthening and rising rates in the U.S., Japan and the euro zone has not been seen since the 1980s, according to Paul Podolsky, an analyst with Bridgewater Associates

The combination could magnify the cyclical pressures on inflation around the globe, he said.

The University of Michigan's February survey of consumer sentiment was revised downward to 86.7 from 87.4, according to news reports. The MarketWatch forecast, based on a poll of economists, was for a stronger reading of 87.7.

The yield curve remained fully inverted Friday. The yield on the 2-year note stood at 4.750%, above the 4.679% yield on the 10-year note and the 4.654% yield on the 30-year bond.

Some economists are nervous about the inversion because they believe it signals a recession.

However, Federal Reserve Chairman Ben Bernanke thinks the inversion in the current environment results from strong foreign demand for U.S. assets and doesn't reflect deteriorating fundamentals


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Well if the ECB, Fed and now the JoB all raise their rates at the same time, the BOE will have to folow or sooner or later the £ will tank.

Interestingly, raising the IR is in itseelf an inflationary act!!

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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