World Economy

Traders Await Fed’s Reaction

Traders Await Fed’s ReactionTraders Await Fed’s Reaction

The bond market is even more skeptical about the chances of a Federal Reserve interest-rate increase this year after the Bank of Japan’s surprise policy move.

Treasuries wrapped up a 2.3% gain in January, the best month in a year, after the BOJ introduced negative interest rates for some bank reserves. The decision prompted traders to assign less than a 60% probability that the Fed will boost its benchmark even once this year, down from the 93% likelihood seen Dec. 31. When policy makers lifted the target from near zero last month, their median projection called for four increases in 2016, Bloomberg reported.

The move from Japan is another sign of slowing global economic growth, which has triggered volatility across global markets, depressed traders’ inflation expectations and spurred a rally in US debt. The European Central Bank has also signaled it may add stimulus. The policy divergence between the US and other major economies risks strengthening the greenback by luring investors to higher-yielding American assets. That could further damp inflation in the US, which hasn’t reached the Fed’s 2% target since 2012.

The yield on benchmark 10-year treasuries fell 13 basis points this week, or 0.13 percentage point, to 1.92%, the lowest close since April, based on Bloomberg Bond Trader data. The 2.25% security maturing in November 2025 rose about 1 1/8, or $11.25 per $1,000 face amount, to 102 29/32.

The effective fed funds rate priced into the futures market for year-end fell to about 0.55%. That’s down from 0.63% a week ago and below the 0.62% level that would imply one more rate increase.