EC Market Data Hints At Higher Rate-Hike Odds

The Federal Reserve isn’t expected to raise interest rates at next week’s policy meeting, but the Nov. 1-2 gathering will be closely watched for signs that the central bank is preparing to make a move when it reconvenes in December.

The futures market is currently predicting a 78% probability that the Fed will squeeze policy on Dec. 14, based on Fed funds pricing via CME as of Oct. 25. By contrast, the probability of a rate hike for next week’s meeting is priced at just 8%.

The market may be confident about the December FOMC meeting, but New York Fed President Bill Dudley prefers to err on the side of ambiguity… for now. “There isn’t this tremendous urgency to act on monetary policy right now,” he told The Wall Street Journal last week. “It’s not like if we wait a meeting or don’t wait a meeting that it has huge consequences for the trajectory of the economy.”

But the crowd isn’t taking any chances, at least in some corners. reports that investors seem to be anticipating higher rates by moving into senior bank loan ETFs. Last week the site advised that PowerShares Senior Loan Portfolio (BKLN), a senior-loan ETF with more than $6 billion in assets, has attracted nearly $225 million in net inflows over the previous week and nearly $1.5 billion in inflows over the previous 90 days, based on data from Invesco PowerShares. “A rising interest rate would negatively affect bond funds as newer debt securities would come with a higher rate, making older bonds with lower yields less attractive,” reminds columnist Tom Lyndon. “Consequently, bond investors may turn to senior loans as a way to mitigate the rate risks but still be able to generate attractive yields.”

The Treasury market appears to be preparing for a rate hike too, but only marginally so. The policy sensitive 2-year yield has been winding higher over the last few months, closed yesterday at 0.86%, which is close to the highest level since June.

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