Bond Traders and Futures Traders Joust Over Direction of Rates

Fed funds futures showed a 58% chance of a rate increase by November but many bond traders don't believe the Fed will raise rates over the next 12 months. Who to believe?

In a Bloomberg article, Eric Liverance, head of derivatives strategy in Stamford, Connecticut, at UBS AG said:

“The market seems wrong on this one.“High unemployment and a continued bad housing market will prevent the Fed from raising rates.”

Other bond traders agree.

“The Fed is not likely to tighten this year or next because it still faces significant headwinds out of the financial and housing sectors,” said Lawrence Dyer, an interest-rate strategist in New York at HSBC Holdings Plc, one of the primary dealers. “Credit is still tight. The market is now better than it was before, but that is a healthy stability. It is not an economic recovery.”

So, who should you believe, the bond traders or the futures traders. Personally, I'd believe the futures traders. They are making their bets with money, not just uttering words. In his oft-quoted book The Wisdom of the Crowds, James Surowiecki explains how markets are often much better at predicting future events than "experts." This is especially true when markets are making predictions that have financial ramifications for those participating.

I'll admit it's hard to see how the market will improve enough by November that the Fed will feel comfortable raising interest rates. But I am often surprised by what happens in financial markets.