From the January 01, 2010 issue of Futures Magazine • Subscribe!

Interest rate policy: Under Pressure

Whether 2010 will be a year when the economic recovery begins to take root could depend on what happens in the Treasury complex and the outlook for interest rates. The global economic crisis kept interest rates frozen near zero throughout 2009. In a November speech before the Economic Club of New York, Federal Reserve Chairman Ben Bernanke reiterated the Fed’s stance that economic conditions would warrant low levels of the Fed funds rate “for an extended period.” The Fed’s actions likely will weigh on the dollar and the economy at large in 2010.

Analysts expect Treasury yields, which are relatively low, to climb a bit in 2010. “I can’t imagine [Treasury yields] moving much lower. Until the Federal Reserve implements policy action, these rates will be reflective of supply and demand for safe assets,” says Mike Kimbarovsky, principal, Advocate Asset Management. “[Three-month Libor] would be the first to react to any uncertainty or volatility [in the market]. It will maintain a low level until there’s uncertainty, and then it’ll spike.”

Kim Rupert, managing director for fixed income at Action Economics, expects the 30-year to hold stable until the middle of 2010, then to climb 30 to 50 basis points by the end of the year. She expects the 10-year yield to hit 3.75% by the middle of next year and rise to 4% by the end. “In early 2010, we have the five-year at about 2.25% and climbing to just over 3% by the end of the year. The two-year, we’ve got climbing to 1% early next year and hitting 2.25% by year end. Three-month Libor will stay at 25 basis points into the middle of next year and maybe rise to 1% by the end of the year,” she adds (see “Yielding little” ).

Carley Garner, analyst and trader at DeCarley Trading, expects the 10-year note futures to trade in the mid-120s in 2010 (see “Talking ten,” page 25), putting the yield at 2.5%. “On the 30-year bond, we could see the low-130s by some point in the first quarter. Two-year notes don’t have a lot of room to move on the upside. I don’t expect the yield to get above 1% until the second quarter of 2010,” she says. Richard Regan, founder of, expects to see all Treasury products rally with yields dropping significantly though the first half of 2010.

“The bond market is far smarter than the Fed,” says Dave Floyd, head of FX research and trading at Aspen Trading Group. “The people who play in the bond market are far more sensitive to what’s going on economically. The bond market’s a much better barometer for what’s coming in terms of interest rates than Fed forecasts.”

But exactly when the Fed will raise interest rates seems difficult to predict. Some say it will happen in mid to late 2010, some say not until 2011. The Fed fund futures traded at the Chicago Board of Trade show virtually no movement until the second half of 2010 (see “Traders expect no action,” page 26). Kimbarovsky expects the Fed to continue to withdraw credit facilities rather than raise the Fed funds rate. “Before [the Fed does] anything on the interest rate side [they’ll] withdraw some of the credit facilities they’ve extended. They decreased the maturity of the discount window from 90 days to 28 days. It’s like a subtle first step to gauge market sentiment without having to raise interest rates,” he says.

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