Lower inflation and tepid growth in the U.S. still mean there’s less room for the Fed to surprise the market, unlike in 2013. That’s when Bernanke shocked investors with his comments about reducing the Fed’s bond buying and prompted them to move up their projections for when near-zero rates would end.
Based on Morgan Stanley’s analysis of futures trading, traders have pushed back their bets for the Fed’s first rate increase to January, from September just a month ago.
Fed officials have steadily lowered their forecasts for how high rates ultimately need to rise to 3.75 percent, from as high as 4.25 percent in January 2012. The overnight target rate has been close to zero for more than six years.
‘Tinder Keg’
“The Fed is making its way to a well-telegraphed rate hike at the same time the economic data is weak,” Tipp said. “You don’t have the same tinder keg as you had then.”
In Germany, alarm over deeper declines have dissipated. The relative cost of bearish options versus bullish contracts on bund futures has plunged since reaching an unprecedented high on May 7, data compiled by JPMorgan Chase & Co. show.
BNP Paribas SA said the euro-area bond slump is nearing an end, while Societe Generale SA said higher-yielding sovereign debt in the region will recoup much of its losses.
To David Ader, the head of government-bond strategy at CRT Capital Group, the latest bout of selling had more to do with panic-stricken buyers fleeing the same trades they all crowded into, rather than a change in the underlying economic outlook.
While deflation worries have ebbed in Europe, economists surveyed by Bloomberg expect consumer prices this year to rise 0.1 percent for the 19 nations that share the euro.
That, plus the fact the ECB plan to keep buying sovereign debt through September 2016 means yields will remain anchored.