While bond traders see a Federal Reserve rate hike Wednesday as all but baked in, they’re still bracing for pre-Independence Day fireworks based on the central bank’s latest pronouncement. - From Bloomberg.com
In that scenario, the bank says 10-year yields and the dollar stand to climb as the outlook may prove more sanguine on the economy than investors anticipated.
Meanwhile, investors have added the most money to fixed-income funds since the first quarter of 2015.
Yet in research the two banks released before Wednesday’s inflation data, they also saw the risk of a dovish or hawkish surprise, leaving scope for Treasuries to either extend a rally that’s driven yields to 2017 lows, or potentially suffer one of the year’s steepest selloffs.
One reason for the uncertainty about a third 2017 rate hike is that policy makers have signaled a plan to start trimming the central bank’s balance sheet, spurring traders to bet that beginning that process would be an alternative to raising rates.
In the hawkish scenario contemplated by TD strategists, officials will opt to “explicitly state that time for balance sheet reduction is approaching.” There would also be no change to the dot plot.