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    Treasury Market Abandons Fed Hike this Year

    The odds for another Federal Reserve rate increase for the remainder of this year have dropped below ten percent and are barely higher for the first quarter of next year. 

    The probability that the Fed Funds upper target rate will be at its current 0.5 percent in March 2017 are 81.0 percent as calculated from the futures prices.

    Bond traders are betting that the central bank will be unable to raise rates for at least two years as equities, commodities and bonds have taken their cues from slowing global economic growth, declining corporate profits and oversupply and weak demand for raw materials. 

    The idea that the American economy could be successfully insulated from the rest of the world and permit the Fed to raise U.S. rates as the rest of the world's central banks were cutting interest rates and adding stimulus to combat ebbing growth and deflation was never very realistic.  

    Fed Chair Janet Yellen admitted in Congressional testimony Thursday that the bank had been studying negative rates, already in place in Japan, parts of European and Scandinavia.  "We are looking at negative rates because we want to be prepared in the event that we need to provide extra accommodation," said Ms Yellen.  I don't think a down turn sufficient to cause the next move (on rates) to be a cut is the most likely scenario, she averred. 

    The Treasury market begs to differ. The probability of a rate cut is higher for the first three quarters of this year than the probability of an increase. 

    Joseph Trevisani

    Chief Market Strategist

    WorldWideMarkets Online Trading

    Charts: Bloomberg

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