Interest rates on way up, say investors

BOND investors, who little more than a month ago were predicting lower interest rates amid a growing risk of deflation to the global economy, now say the next move by the Federal Reserve, the European Central Bank and the Bank of England will be to increase interest rates.

“There’s been an absolute U-turn in rate expectations,” said Rajeev Demello, who manages the equivalent of $5.8 billion in euro-region bonds at Pictet & Cie, Geneva’s largest private bank. “No one expects a cut anymore.” Not after the US economy, the world’s biggest, showed annualised growth of 2.4% in the second quarter; in Japan, the number two economy, household spending had its biggest gain in almost two decades in June and in Germany, the third-largest economy, business confidence rose to a one-year high in July.

December futures contracts indicate investors who on June 13 had seen as much as a half-point cut in the benchmark federal funds rate aren’t forecasting another reduction. Fed policymakers meet this week to decide on interest rates, with all of the 78 economists polled by Bloomberg News forecasting no change. The Fed will raise rates in the second or third quarter of next year, a survey of 53 economists showed. In Europe, the yield on the three-month Euribor contract for December rose above the three-month money market rate this month, ending almost a year of rate-cut expectations. The June contract yielded 2.45% yesterday morning in Frankfurt, suggesting investors predict rising rates by the end of the first half.