Bond investors are again examining whether the Federal Reserve may consider additional quantitative easing as global economic weakness and uneven domestic growth hamper policy makers’ efforts to raise interest rates.
Bond-fund manager Bill Gross on Wednesday said the U.S. may see a fourth round of Fed bond buying, or QE, “in a year or so.” Meanwhile, Citigroup Inc. said the bond market appears to be pricing in a higher risk of QE4 as traders pare bets on when U.S. policy makers will be able to raise rates again.
“Prepare for renewed QE from the Fed,” Mr. Gross, manager of the $1.3 billion Janus Global Unconstrained Bond fund, wrote in his monthly investment outlook for May. “Interest rates will stay low for longer, asset prices will continue to be artificially high.”
Treasuries have returned 3.3% this year as traders back away from bets on Fed policy tightening amid concerns that slow growth abroad could tarnish U.S. economic prospects. Fed officials have been peppered in the past with questions about the potential for negative U.S. interest rates and more bond buying after central banks in Europe and Japan adopted negative rates and expanded easing policies. At a meeting last month Fed officials remained positive about the underpinnings of U.S. growth and downplayed global risks.
The yield on the 10-year U.S. Treasury note rose two basis points, or 0.02 percentage point, to 1.79% at 6:29 a.m. New York time, after falling 10 basis points in the previous two days, according to Bloomberg Bond Trader data. The 1.625% note due in February 2026 fell 1/8, or $1.25 per $1,000 face amount, to 98 1/2. The yield has fallen from 2.29% at the start of the year.
Treasuries surged by the most in two months on Tuesday after data from China to Europe pointed to a slowing global economy still in need of central-bank support.
Futures show traders see a 10% probability of a Fed rate increase by June, down from a 75% chance traders assigned such a move at the start of this year. The probability of a move by year-end has fallen to 52% from 93%. Fed funds futures show traders aren’t fully pricing in another Fed hike until next year.
“If investors see the data as so soft as to justify only one hike a year, they also see the probability distribution of outcomes as encompassing negative rates in theory and QE4 in practice,” Steven Englander, New York-based global head of Group-of-10 currency strategy at Citigroup, wrote in a note to clients May 3. “If you really think that a full hike is not likely until May 2017 (as is now priced in), you have to think there is a non-negligible probability that the economy is so bad that you would want to cut.”
Fed officials in March reduced their median forecast for 2016 rate increases to two from four, after raising rates for the first time in almost a decade in December. In an interview in January, Ray Dalio, the founder of Bridgewater Associates, said the next move for the Fed would be toward another QE rather than monetary tightening.
With U.S. inflation gauges running below its 2% target, the Fed has built a case for lifting rates largely on the strength of the labor market, yet even that may be in question. A private report Wednesday showed U.S. companies added fewer workers than forecast in April, while Labor Department data Friday will show the U.S. added 200,000 jobs last month, according to a Bloomberg survey of economists.
A report Wednesday showed American service companies expanded in April at the fastest pace in four months.
Forecasters say Treasury yields will probably climb to 2.25% by year-end, according to a separate Bloomberg survey. They have ratcheted that prediction lower since the start of January, when the median prediction for the end of 2016 was about 2.8%.
“Yields are lower because the market perceives things are going to come off the rails in the U.S. economy,” Mr. Englander said in a phone interview Wednesday. Mr. Englander says QE4 “is unlikely” and that he expects the Fed will raise rates twice this year.
