Mohamed El-Erian said Federal Reserve officials are promoting the idea that they're preparing to raise interest rates, as a global bond market rally slows.
Officials “continue to talk up” an increase, Mr. El-Erian, the chief economic adviser at Allianz SE and a Bloomberg View columnist, wrote on Twitter Sunday, as two more policy makers at the weekend signaled that a U.S. interest-rate increase is looming. John Williams, president of the Fed Bank of San Francisco, said Sunday on Fox News the economy should be solid enough to merit raising rates in 2016. Eric Rosengren, head of the Boston Fed, said the U.S. is near the threshold for a move, the Financial Times reported Sunday. Mr. Rosengren votes on the policy committee this year, while Mr. Williams does not.
A rally that sent global yields to a record low has slowed in the past few weeks as investors prepare for the Fed to act as soon as its next meeting June 14-15. The average yield on the bonds in Bank of America Corp.'s Global Broad Market Index climbed to 1.35% on May 20 from the all-time low of 1.27% set May 11.
“The Fed's communications assault” has pushed the market to price a higher possibility of a rate increase in June, said Peter Chatwell, head of rates strategy at Mizuho International Plc in London. “Long-end Treasuries have gotten expensive over the past two to three months as the lack of yield in other major bond markets meant that they enjoyed strong international support.”
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Benchmark Treasury 10-year note yields fell two basis points, or 0.02 percentage point, to 1.82% as of 6:32 a.m. in New York, according to Bloomberg Bond Trader data. The 1.625% security due in May 2026 rose 6/32, or $1.88 per $1,000 face amount, to 98 7/32.
The odds of the Fed raising rates in July have climbed to 48% from about 26% at the start of the month, according to data based on fed fund futures compiled by Bloomberg. The calculation assumes the effective fed funds rate will average 0.625% after the central bank's next increase.
St. Louis Fed President James Bullard said in Beijing Monday that “the slower, below-trend pace of recent U.S. growth is inconsistent with a slowly rising path for the policy rate.”
Regional Fed chiefs for San Francisco and Philadelphia are also due to speak Monday and may shed more light on the likelihood of rates being raised next month.
Atlanta Fed President Dennis Lockhart and San Francisco's Williams both said last week at least two increases may be warranted this year. Most central bank policy makers said in April an interest-rate increase would be appropriate in June if the economy continued to improve, but they were divided over whether those conditions were likely to be met in time, based on the minutes of the session issued last week.
Fed officials are moving too quickly because inflation is still too low, said Gary Dugan, the chief investment office for wealth management at Emirates NBD PJSC, the largest bank in the United Arab Emirates with $414.5 billion in assets.
The annual change in the Commerce Department's price index tied to personal spending, one of the measures the Fed uses to gauge inflation, has been below the central bank's 2% target for four years.
“They do seem to be single-minded about raising interest rates, and they seem to have gotten themselves into a bit of a frenzy,” Mr. Dugan said in an interview in Singapore. “It'd be a huge risk” to the economy if policy makers act.
Ten-year yields may fall toward 1.6% this year, he said. “If we get 10-year yields up anywhere close to 2 percent, I think they're a steal.”
