May 7 (Reuters) - U.S. investors who had been betting the
Fed would raise rates as early as the end of next year abruptly
retreated from those positions on Friday after a disappointing
April employment report and now see the earliest the Fed might
tighten roughly two years away.
The push back in expectations for when the Fed might start
raising rates also means any reduction in the pace of its bond
buying - which the Fed has said will begin first - may also
occur later than some investors had been betting.
April's employment growth came in far short of expectations,
probably restrained by a shortage of workers and raw materials
even as demand improved rapidly. It would be hard to argue it
stands as "substantial further progress" toward maximum
employment, the test the Fed has said it must achieve before it
begins dialing back its massive support for the
"It was a rude awakening. It could be what the Fed is
worried about, that we're going to continue to see uneven
numbers and it's not just going to be smooth sailing," said
George Goncalves, head of U.S. macro strategy at MUFG.
Following April's meeting, investors were betting the Fed
would raise rates in late 2022 or early 2023 and would offer
clues about tapering its $120 million in monthly asset purchases
as soon as June 2021.
U.S. interest rate futures on Friday, however, showed that
traders pushed out expectations of a rate hike by roughly three
months after Friday morning's payrolls report. Eurodollar
futures, a proxy for interest rate expectations, showed a 90%
chance of an interest rate hike in March 2023, and fully priced
in a hike in June 2023. Prior to the report, investors were
betting there was a 90% chance of a hike in December 2022, and a
100% chance in March 2023.
Goncalves said that "we would probably need two to three
more months like this to push back tapering."
Investors still see the Fed needing to lay out a roadmap to
tapering. Rick Rieder, BlackRocks chief investment officer of
global fixed income, said in a note that conditions "argue for
at least beginning to lay out a plan for asset purchase
tapering, even if the Fed is more likely to hold off on this
transition for now."
The change in interest rate expectations brings the market
more in line with the Fed's dovish approach to the coronavirus
pandemic recovery. Though economic data has been improving, the
Fed has said it has no plans to raise rates until maximum
employment is achieved.
"I don't believe this report changes the calculus of Powell
or the core FOMC," said Gregory Whiteley, portfolio manager at
"The Fed is looking for maximum employment. They've said it
will take quite a while to get there. Today reinforces that idea
- although a lack of strong GDP growth does not appear to be
behind today's disappointment."
TD Securities strategist Penglu Zhao wrote in a note on
Friday that speculators had last week piled into bearish bets on
Treasury prices, on the expectation of a stellar payrolls print.
Commodity Futures Trading Commission data released on Friday
showed that speculative positioning in U.S. 10-year Treasury
futures flipped from a net long of 55,759 contracts to a net
short of minus 7,245 contracts in the week through May 4.
Shorter-dated Treasury yields, which move with expectations
of interest rates, fell in the wake of the report. The two-year
yield, dropped to its lowest level since March,
before recovering somewhat, last down 1 basis points to 0.147%.
Yields at the long end of the Treasury curve initially fell
following the report, but quickly recovered. The 10-year yield
, after hitting the lowest level since March 4,
retraced the move to last trade at 1.579%, flat on the day.
Goncalves argued that the recovery in longer-dated yields
was in anticipation of auctions of new 10- and 30-year bonds
(Reporting by Kate Duguid and Ann Saphir; additional reporting
by Gertrude Chavez-DreyfussE
Editing by Tony Chopra, Peter Graff and Diane Craft)