Fed Could Start Raising Rates Next July and Today’s Other Top Stories

Traders are betting the Federal Reserve will start raising rates sooner than expected after a jump in jobs growth last month boosted confidence in the staying power of the U.S. recovery.

U.S. short-term interest-rate futures contracts plunged as traders priced in higher rates next year on the strength of a government report showing employers added 321,000 jobs last month, the most in nearly three years.

“This supports the view that the Federal Reserve will start hiking rates in the middle of next year,” according to Mohamed El-Erian, chief economic advisor at Allianz in Newport Beach, Calif.

Rate-futures contracts now show that traders see about a 53 percent chance that the first Fed rate hike will come in July 2015, based on CME FedWatch, which tracks rate hike expectations using its Fed funds futures contracts. Before the report traders had not expected a first rate rise until September.

In October, the Fed wound down its bond-buying stimulus in a nod to a stronger labor market, but still pledged to keep rates where they are for a “considerable time” to allow the recovery more traction. When they next meet Dec. 16-17, hawkish policymakers concerned that a stronger labor market could augur unwanted inflation may redouble their efforts to take the pledge out and pave the way for an earlier rate rise.

Friday’s data showed hourly wages rose just 2.1 percent, a bit faster than they had been tracking but well below the 3 percent to 4 percent that Fed Chair Janet Yellen has said would reflect a healthy economy.

Its likely that the Fed will want to see signs that inflation is on its way back up to their 2-percent target, and will be watching the wage data closely.

Policymakers will submit new economic forecasts at this months policy-setting meeting due to take place on Dec. 16-17, although it is unclear how much Friday’s report will change those.


Todays Other Top Stories

Learn Bonds

Learn Bonds: – Does Active Management for Bonds Make Sense? – Part 1. – Is there any value in actively managing bond investments?  After all, with all those ETFs and bond mutual funds out there, many that reflect an index, why bother paying someone to manage a fund?


Municipal Bonds

Van Eck: – Is green the color of munis? – According to Bank of America Merrill Lynch (BAML) in a November issue of its Municipals Weekly: “Since green bonds officially debuted in the U.S. municipal bond market in June 2013, roughly $1.6 billion of green bonds are scheduled to, or have been issued.” While still a nascent market, the applicability and suitability of green bond issuance for municipal issuers is endless.

Advisor Perspectives: – Three Reasons Why Municipal Bonds May Offer More Than Just Tax-Exempt Income. – Tax-exempt income historically has been the main reason why investors buy municipal bonds. As a result of newer tax laws, including several provisions that expired at the end of 2013, tax bills for high-income earners have increased in recent years. We believe that these higher tax rates increase the incentive for taxpayers to seek tax-exempt income using municipal bonds.

FTSE Global Markets: – Muni Bond Issuance up Only Slightly Next Year Says SIFMA. – (Subscription) SIFMA latest municipal bond issuance survey suggest that respondents expect total municipal issuance, both short- and long-term, to reach $357.5bn next year, up slightly from the $348.1bn estimated issuance in 2014.


Bond Market

Times Union: – 2015 bond outlook: low expectations. – The bond market will likely produce modest returns, if they’re positive at all, according to many bond-fund managers. It’s a matter of math: Bonds are offering very low interest rates following a decades-long drop in yields. That means they’re producing less income.

PIMCO: – The Great Escape. – With QE done and rate hikes likely in 2015, the Fed is close to achieving its great escape​​.


Treasury Bonds

Market Realist: – The monetary policy announcement impacts U.S. Treasuries. – Monetary policy announcements are significant events for the fixed-income market. For the fixed-income market, the policy is a direct signal for the country’s key interest rate. Although a central bank can’t force commercial banks to make changes to their rates based on its signal, it can strongly indicate where it would like interest rates to be.

Focus on Funds: – TIPS Funds See Biggest Weekly Withdrawal in 14 Months. – Falling oil prices against the backdrop of already low inflation prompted the biggest weekly rush out of funds that hold Treasury inflation-protected securities, or TIPS, in more than a year.


Investment Grade

Bloomberg: – Global Company-Bond Sales Pass $4 Trillion for First Time. – Global sales of corporate bonds breached the $4 trillion threshold in an already record-setting year as companies load up on cheap financing before a forecasted rise in interest rates next year.


High Yield Bonds

Income Investing: – Higher-Rated Bonds Benefit As Oil Hurts High Yield. – Ned Davis Research today tells investors to mind their high-yield exchange-traded funds, because – as I pointed out in my Current Yield column last month – high-yield funds are becoming bets on the energy sector, with varying degrees of sector exposure.

ETF Trends: – High-Yield Bond ETFs Losing Their Equity Correlation. – Since the financial downturn, high-yield bond exchange traded funds have exhibited a high correlation to the broader equities market. However, the recent tumult in junk bond ETFs has not been reflected in the equities market this time around.


Emerging Markets

IFR Asia: – Markets Question Economics on Argentina’s Boden swap. – Argentina’s liability management transaction drew a mixed reaction Thursday, as the country looks to reduce rollover risk ahead of presidential elections next year and possibly strengthen its hand in any negotiations with holdout investors, say analysts.


Investment Strategy

Money Beat: – Wealth Adviser: The Big Risk in Immediate Annuities. While they’re still a small slice of the overall annuity market, sales of single-premium immediate annuities have risen sharply this year. And that has some financial planners concerned, particularly about their use by investors who aren’t retired yet and who could see the buying power of their monthly payouts whittled down by inflation.


Bond Funds

Star Tribune: – Low Yields Mean Mutual Fund Managers Forecast Muted Returns, if Any, From Bonds in 2015. – The bond market will likely produce modest returns, if they’re positive at all, according to many bond-fund managers. It’s a matter of math: Bonds are offering very low interest rates following a decades-long drop in yields. That means they’re producing less income.

Investment News: – Unconstrained Bond Funds Disappoint. – Morningstar says the category that includes many of these funds is up just 1.7% year-to-date.

CNBC: – Pimco’s ex-investors may not be better off. – When Bill Gross bolted Pimco in late September after months of mediocre performance in his Total Return Fund, clients including Wells Fargo & Co. and Charles Schwab Corp pulled over $61 billion from the Newport Beach, California-based money manager. Where the money landed may be no better than where it left.

The Spokesman-Review: – Low Bond-Market Expectations Likely to Hurt Mutual Funds. – The bond market will likely produce modest returns, if they’re positive at all, according to many bond-fund managers. It’s a matter of math: Bonds are offering very low interest rates following a decades-long drop in yields. That means they’re producing less income.

ETF Trends: – Market Vectors to Close Five ETFs. – Van Eck Global’s Market Vectors unit, the tenth-largest U.S. sponsor of exchange traded funds, said Friday it plans to liquidate five ETFs.


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