The Fed, which has kept its benchmark overnight bank lending rate in a range of zero to 0.25 percent since 2008, said in December it would maintain that rate while unemployment held above 6.5 percent and inflation stayed below 2.5 percent.
Unemployment Bets
The rise in short-term yields “could reflect to some extent expectation that the unemployment rate is going to get to 6.5 percent before the Fed expects and that therefore the rate hikes are going to start sooner than the Fed anticipates,” Alan Levenson, the chief economist in Baltimore at T. Rowe Price Associates Inc. said Sept. 11 in a telephone interview. The firm oversees about $614 billion.
Investors may also have been anticipating changes in Fed policy when Bernanke steps down in January.
The market reflects “leadership uncertainty at the Fed,” Prudential’s Schiller said before the announcement by Summers.
Bond investors globally have been demanding higher yields on shorter-term developed-nation government debt amid speculation that their central banks won’t fulfill pledges to keep down rates as growth quickens.
Average yields on developed-market debt due in three years or less are the highest since 2011, rising to 0.51 percent on Sept. 5, according to the Bank of America Merrill Lynch 1-3 Year G7 Government Index.
“Forward guidance is an attractive concept but what the market is looking at is the economic data at the moment, and that’s looking a little bit better,” Craig Veysey, the London- based head of fixed income at Sanlam Private Investments Ltd., which manages more than $10 billion, said in a Aug. 29 telephone interview. “The market wants to look at pricing in interest rate changes sooner than the forward guidance would suggest.”