July rate hike odds are twice what bond market sees: Goldman Sachs

NEW YORK: Goldman Sachs Group says there's a 40 per cent chance the Federal Reserve will raise interest rates in July — almost double what the bond market projects — as Chair Janet Yellen kept prospects for a move this year alive. Yellen presented an upbeat view of the economy in a speech Monday, even after weaker-than-expected US jobs data on June 3, Goldman Sachs analysts including New York based Chief Economist Jan Hatzius, wrote in a note to clients. The firm is one of the 23 primary dealers that trade directly with the US central bank.

Yellen's remarks in a speech in Philadelphia sent 10-year Treasuries to their biggest decline since May 18, unwinding some of last week's biggest gain in almost five months. She said the US economy was making progress although she was silent on the timing of another rate increase. The Fed will stay on hold at its June 14-15 meeting, according to the Goldman Sachs report.

"The basic macro economy in the US is very firm," said Kei Katayama, a bond manager in Tokyo at Daiwa SB Investments, which has about $50 billion in assets. "Yellen wants to hike the rate, even in July."

Treasuries will probably hold near current levels until the next employment report, Katayama said. "Eventually, I think yields will go up."

Benchmark Treasury 10-year notes were little changed Tuesday, with the yield at 1.73 percent as of 8:22 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.625 per cent security maturing in May 2026 was 99 3/32. The yield climbed four basis points Monday.

Goldman's Hatzius is sticking with his view published after last week's employment report that there's a 40 per cent chance of a July rate increase. As recently as March, he was predicting the Fed would raise rates three times this year. There's a 61 per cent probability the central bank will move by year end, climbing from 53 per cent a month ago, according to data compiled by Bloomberg based on futures contracts. The chance of an increase next month is 24 per cent, up from 22 per cent Monday. Futures indicated odds of 55 per cent before last week's jobs data.