SINGAPORE (BLOOMBERG) - US investment bank Goldman Sachs says financial markets are vulnerable because nobody can agree on what the Federal Reserve will do. Treasuries whipped around amid the debate.
US government securities rose on Wednesday (Sept 16), rebounding from a rout on Tuesday when retail sales data increased speculation the Fed will raise interest rates this week. Goldmans chief economist Jan Hatzius said the US central bank probably won't act until December, or maybe not until 2016. The lack of consensus is a reason for policy makers to hold off when they finish their meeting Thursday, he said.
"There will be some concern that the market's not prepared," Mr Hatzius said in an interview on Tuesday with Bloomberg. "There's a risk of an adverse market reaction."
Goldman is one of the 22 primary dealers that trade directly with the central bank.
Treasury 10-year note yieldsfell three basis points to 2.26 per cent as of 6:42 am in London, based on Bloomberg Bond Trader data. The price of the 2 per cent security due in August 2025 rose 7/32, or US$2.19 per US$1,000 face amount, to 97 22/32.
Yields jumped 10 basis points on Tuesday, the biggest increase in almost three weeks. The move left the Bloomberg U.S. Treasury Bond Index down 0.3 per cent this month through Tuesday, while it is hanging on to a 0.5 per cent gain for 2015.
The increase in Treasury yields shows bondholders are preparing for the Fed to act, said Kim Youngsung, head of overseas investment in Seoul at South Korea's Government Employees Pension Service, which manages the equivalent of US$12.7 billion. By contrast, a gain in US shares on Tuesday suggests stock investors expect the Fed to wait, he said.
Futures contracts show the odds that the central bank will move this week are 32 per cent, according to data compiled by Bloomberg. The calculation is based on the assumption that the benchmark rate will average 0.375 per cent after the first increase, versus the current target of zero to 0.25 per cent.
"Nobody knows," Mr Kim said. "That is why nowadays the market is fluctuating so much."