SAN FRANCISCO (Reuters) - With yields on U.S. 10-year Treasuries as low as they are, the Federal Reserve needs to be careful about raising U.S. interest rates further, Dallas Federal Reserve President Robert Kaplan said on Tuesday.

The low yields suggest markets expect “sluggish” growth ahead, Kaplan said, and while he is comfortable about where interest rates are now, “I think there’s a point that if the 10-year Treasury rate stays at the level it’s at, we’ve got to be very careful about how we remove accommodation.”

Kaplan, speaking at the Commonwealth Club of California, also said now that the Fed has engineered two rate hikes this year it is time to wait for more evidence that recent weak inflation is indeed transitory, as Fed Chair Janet Yellen has said is likely. </s> Dallas Federal Reserve Bank President Robert Kaplan on Tuesday said his "baseline" view continues to be for three U.S. interest-rate hikes this year, including the increase in March.

The pace of hikes could be faster, or slower, he said, if the economy performs better, or worse, than he now expects, Kaplan said at an event at the Bush Institute in Dallas. </s> The U.S. Treasury yield curve is flashing warning signs on the economy, pointing to a less optimistic prediction for longer-term economic growth at the same time as Federal Reserve officials are adopting a more aggressive tone on raising interest rates.

A flattening yield curve is often interpreted as a negative economic indicator as it shows concerns about the future pace of growth and inflation, because buyers of long-dated debt would demand higher yields if they expected higher costs.

“The Fed’s optimism has no real counterpart in any of the data that we’ve seen so far,” said Aaron Kohli, an interest rate strategist at BMO Capital Markets in New York “The presumption of weak economic growth is fairly firmly rooted and you can see that in the long-end of the curve.“ Dallas Federal Reserve Bank President Robert Kaplan on Tuesday said that the yield curve showed the market expected sluggish growth ahead; however, New York Fed President William Dudley said this week that the flat yield curve reflects low overseas inflation and borrowing costs and not a weakening U.S. economy.

The yield spread between five-year Treasury notes and 30-year Treasury bonds on Wednesday flattened to 95 basis points, the narrowest since December 2007.

The gap between two-year note and 10-year note yields also declined to 80 basis points, just above 10-year lows of 73 basis points reached in mid-2016.

The yield curve reflects the extra interest investors require to buy bonds of a longer maturity. When they demand higher payments for shorter-dated bonds than for longer-dated ones it shows that they are more concerned about nearer-term risks.

The flattening is not yet near an inversion, which is typically seen as a harbinger of a recession.

The curve flattened this week after Fed officials including Dudley and Boston Fed President Eric Rosengren took a more aggressive view to rate hikes, which sent shorter-dated bond yields higher.

That came despite recent data that shows inflation retreating from Fed targets and weakening retail sales and housing data.

Still, there is not widespread alarm of the risk of a recession. Economists at Deutsche Bank said earlier in June that the chances of a U.S. recession in the next 12 months are remote. Jeffrey Gundlach, chief executive officer at DoubleLine Capital, said the flatter curve would start being a concern “when two– and three-year U.S. Treasuries yield about the same.”

An economic downturn would be a setback for U.S. President Donald Trump who during his campaign had vowed to lift annual GDP growth to 4 per cent, though administration officials now see 3 per cent growth as more realistic. First-quarter economic growth disappointed.

Irrespective of economic predictions, investors say demand for high-quality assets is also helping to flatten the U.S. yield curve, as there are few other options that generate returns.

“The market is starved for product and starved for yield and has to be invested. We are still one of the highest-yielding bond markets on the planet,” said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.

The flattening yield curve may further loosen financial conditions despite the Fed’s attempts to tighten them, giving an additional boost to risk assets like stocks regardless of the strength of the economy.

That’s because long-dated debt is heavily influenced by pension funds, hedge funds and other participants that lend across the economy, often known as the “shadow banking” industry, and not the U.S. central bank.

“The Fed doesn’t have control over the monetary base because the pile of money represented by shadow banking is so much bigger than what the Fed has under its control,” said Lou Brien, a market strategist at DRW Trading in Chicago.

The Chicago Fed’s National Financial Conditions Index shows that economic conditions have in fact loosened from a year ago even though the Fed has raised rates three times since then.

As the flattening yield curve forces investors to chase higher returns to meet investment objectives, the curve could become even flatter, according to Brian Reynolds, chief market strategist at New Albion Partners in New York.

But history suggests it would be some time before the curve inverts, and even longer before stocks take a turn for the worse, he said.

When the yield gap between two-year and 10-year notes was similar to current levels in 2005 at around 80 basis points, it took 11 months for the yield curve to invert, after which stocks gave an annualized return of 14.8 per cent before the bear market began 21 months later, Reynolds said.

In 1994, the yield curve took an additional three and a half years to invert from current levels and in that instance stocks returned 21.6 per cent on an annualized basis after the inversion before the bull market ended 22 months later, Reynolds said. </s> The Federal Reserve should be cautious about any further interest-rate hikes, Dallas Federal Reserve President Robert Kaplan said on Friday, just two days after he voted with the majority of his colleagues to raise rates for the second time this year.

"We should be very careful about raising rates and we should do it patiently and carefully," Kaplan said at a meeting of the Park Cities Rotary Club in Dallas, adding that he will need to see improvements in inflation, which has weakened in recent months.

Fed Chair Janet Yellen earlier this week expressed confidence that with the U.S. unemployment rate at a 16-year low of 4.3 percent, inflation will rise toward the Fed's 2-percent goal over the medium term. Kaplan's comments suggest that her confidence may not be fully shared by all her colleagues.

Kaplan also repeated his call for immigration reform, continued trade with Mexico and more global integration as ways to counter slow U.S. economic growth.

"I'd love to see our country make the right decisions on how we think about trade," Kaplan said, adding that running a trade deficit with Mexico is different from running a trade deficit with some other countries like China because trade with Mexico boosts jobs and competitiveness in the United States.

The U.S. also needs to "come to grips" with immigration reform, he said, because immigrants have historically been big contributors to U.S. labor force growth. </s> Washington: The Federal Reserve has raised a key interest rate in response to a solid US economy and expectations of higher inflation, and it foresees three rate hikes in 2017. The Fed's action Wednesday will mean modestly higher rates on some loans.

The central bank announced after its latest policy meeting that it's increasing its benchmark rate by a modest quarter-point to a still-low range of 0.5 percent to 0.75 percent. The Fed last raised the rate in December 2015 from a record low near zero set during the 2008 financial crisis.

The Fed's move, only the second rate hike in the past decade, came on a unanimous 10-0 vote. It also released an updated economic forecast that showed modest changes to its outlook for economic growth, unemployment and inflation, mainly to take account of stronger growth and a drop in the unemployment rate for November to a nine-year low of 4.6 percent.

Its new projection has the unemployment rate dipping to 4.5 percent by the end of 2017 and remaining at that level in 2018.

The Fed foresees economic growth reaching 1.9 percent this year, slightly above its forecast in September, and 2.1 percent in 2017. That's slightly more optimistic than it projected in September.

The Fed kept its long-term estimate for economic growth at 1.8 percent, far below the 4 percent pace that President-elect Donald Trump has said he can achieve with his program of deregulation, tax cuts and increased spending on infrastructure.

The Fed's estimate that it will raise rates three more times in 2017 is up from an estimate of two increases at the September meeting. Its policy statement showed only modest changes in wording from the previous meeting. It said "economic activity has been expanding at a moderate pace since mid-year" helped along by solid job growth.

Trump's plans for tax cuts and infrastructure spending have led investors to expect that inflation will pick up in coming months.

The economy, after growing at an anemic annual rate of 1.1 percent in the first half of this year, accelerated to a 3.2 percent pace in the July-September quarter. That pickup has lifted hopes that the economy will keep rising, fueled by steady hiring gains.

In the month since Trump's victory, investors have sent stock prices surging to record highs and driven up bond yields. The markets have calculated that Republican control of Congress will enable Trump to cut taxes, ease regulations and accelerate infrastructure spending - and that higher economic growth, inflation and corporate profits will result.

The Fed's action Wednesday should have little effect on mortgages or auto and student loans. The Fed doesn't directly affect those rates, at least not in the short run. But rates on some other loans - notably credit cards, home equity loans and adjustable-rate mortgages - will likely rise soon, though only modestly. Those rates are based on benchmarks like banks' prime rate, which moves in tandem with the Fed's key rate.

Mortgage rates have been surging since Trump's election victory last month on expectations that his economic program will accelerate economic growth and inflation.

Some Fed watchers expect faster growth to lead the central bank to shift its focus from trying to energize the economy to considering ways to counter the risk of too-high inflation. On that assumption, some are revising their forecasts for Fed rate hikes in 2017.

Before Trump's victory, the consensus view of economists was for two Fed rate increases next year. Now, some say they foresee three or possibly as many as four. Others think the Fed will be hesitant to step up the pace of rate hikes. For one thing, Trump's economic program still must win congressional approval and could undergo significant change along the way.

Last month after Trump's election, Fed Chair Janet Yellen told a congressional committee that Fed officials would be monitoring Congress' actions and "updating our economic outlook as the policy landscape becomes clearer." Other Fed officials have endorsed that wait-and-see approach. </s> Fears about the inflationary potential of Donald Trump’s planned tax cuts and infrastructure spending have sent shock waves through the world’s bond markets, as investors take fright at the prospect of higher than expected interest rates in the years ahead.

Central banks are braced to suffer fresh losses on their vast holdings of government debt after the sell-off that saw $1tn wiped off the value of bonds last week intensified on Monday.

Bond prices fell for a sixth day running in the UK, pushing the yield on government gilts to their highest level since the weeks leading up to the EU referendum, and US bond yields reached levels last seen in December 2015. Bond yields, the rate of interest an investor gets, rise when bond prices go down.

The sell-off has been triggered by concerns about the impact of Trump’s economic policies when he arrives in the White House in January.

Share prices have risen since the US election on optimism that stronger growth will result in higher corporate profits. At one stage on Monday, the Dow Jones Industrial Average – which measures the value of the top 30 US companies – was up nearly 90 points at a new intra-day high of 18934 points.

The president-elect is promising tax cuts for both companies and individuals together with a $550bn boost to infrastructure spending in order to raise the US growth rate from 2.5% to 3.5% a year.

Financial markets, however, think the reflationary package will also push up the cost of living and force the Federal Reserve, the US central bank, to raise interest rates more rapidly than had been expected.

Adam Slater of Oxford Economics said: “The US election has prompted a sharp re-pricing of many financial assets, based on expectations of a significant shift in US fiscal policy. Markets now expect medium-term inflation and interest rates, consistent with a hefty fiscal stimulus.”

Slater said that the decline in bond prices evident since the summer had been intensified by Trump’s win. The total return on a 10-year US Treasury bond was down 7% in the past four months, comparable to the so-called “taper tantrum” of 2013, when global bond prices slumped on fears of higher interest rates from the Fed.



For the past eight years, central banks have held borrowing costs at record-low levels and used vast bond-buying programmes known as quantitative easing to pump money into struggling economies. Central bank buying has limited the supply of bonds and pushed up their price.



Since Trump’s victory over Hillary Clinton, bond prices have gone into reverse as investors contemplate a period of political uncertainty, a possible trade war between the US and China, and the risk that the world’s biggest economy will overheat.

David Marsh, the managing director of the thinktank Omfif, said: “Central bankers have worried for some time that an otherwise welcome international growth revival would depress inflated bond prices and confront central banks with substantial losses on government securities acquired during bond-buying sprees since 2009.

“Europe is particularly exposed, since the ECB started buying only relatively late, in March 2015, at a time when bond prices were already very high.

“A sharp rise in sovereign yields in Europe since Trump’s win last Tuesday, together with an increase in euro area inflation expectations to an eight-month high, will buttress opposition on the ECB’s governing council to an extension in ECB quantitative easing beyond March 2017.”

The yield on 10-year US Treasury bills has hit its highest level since January, rising to 2.23% from 2.1% last week. Shorter-dated two-year debt and long-dated 30-year bonds also hit their weakest points since the start of the year.



The knock-on effects from lower bond prices in the US have been felt in the UK and other European markets. Bond prices rose strongly in the UK after the Brexit vote as nervous investors looked for safe havens and anticipated that interest rates would be cut to boost activity. But the yield on 10-year gilts has tripled since the trough of 0.5% in early August.



Simon MacAdam, an economist at Capital Economics, said: “Treasury yields have risen sharply since the US elections, reflecting anticipation of a major fiscal stimulus under President Trump. But while we are nudging up our forecasts for government bond yields in Europe, we still don’t expect that they will rise as fast as in the US.” </s> Image copyright Eyewire

A wave of selling sweeping across bond markets resumed on Monday as investors continued to digest the impact of a Donald Trump presidency.

US and European bond prices have sunk in expectation that he will enact inflationary policies that speed the pace of interest rate rises.

On Monday, some bond yields - which rise as the price falls - hit their highest for more than six months.

Bonds globally lost $1.29tn (£1tn) last week, according to Bank of America.

And there is no sign that the bond sell-off is easing, depressing the value of some pension investments and making it more expensive for countries and companies to borrow money.

On Monday, the 30-year US Treasury jumped above 3% for the first time since January. In the UK, the 10-year gilt yields returned to levels not seen since June's Brexit referendum vote. And German 30-year bunds rose above 1% for the first time since early May.

Italian bonds have been among the most affected. Rome's 10-year yields rose four basis points to 2.01% on Monday, their highest in 14 months.

"It is a continuation of this recent trend. There are still these expectations that inflation could go up if the US takes a more expansionary fiscal stance," said DZ Bank strategist Daniel Lenz said.

Jim Cielinski, head of fixed income at Columbia Threadneedle, said the sell-off trend was not surprising, but the "ferocity of the reversal" was.

And in a research note for Societe Generale, analyst Daniel Fermon said that rising interest rates may not be a good thing.

"As central banks are now less active in the bond market and Trump expects to cut taxes and launch a $1tn infrastructure investment plan, increasing the deficit, we believe rising US long-term rates remain a major risk for financial markets," he said.

Dollar strength

Investors had piled into bonds, seeking a safe - but low - rate of return during what has been years of sluggish growth in the US, Europe and Japan.

Image copyright AFP Image caption Donald Trump's win has raised much speculation about how the US-China relationship could change

But since inflation and interest rates are seen as likely to rise, investors are seeking assets with a more attractive return. With a Trump administration promising economic stimulus through spending and tax cuts, investors are worried about putting money into low fixed-payment assets, such as bonds.

That has fuelled share markets since last Wednesday's election result.

Wall Street's Dow Jones index closed at another record high on Friday, in the wake of Mr Trump's unexpected victory. European markets have also risen, and at midday on Monday, the FTSE 100, Cac-40 and Dax were all slightly higher. Earlier, Japan's Nikkei index hitting a nine-month high, closing up 1.7%.

Andrew Walker, BBC World Service economics correspondent

Bond yields are up in the eurozone's financially stressed countries, such as Italy, Spain and Portugal and the moves have been quite pronounced over the last few days. Rising government borrowing costs were one of the central features of the region's financial crisis. So are we are looking at a re-run?

There are three important differences to keep in mind. Those borrowing costs are still well below crisis levels. At the time, a rule of thumb for whether a bailout was needed was ten-year government borrowing costs of more than 7%. Italy has just gone over 2%, Portugal is 3.5%. And it's happening to them all.

Even ultra-safe Germany has seen its government bond yields rise, although they are much lower than Italy's. And the impetus is coming from outside, from political events in the US. Still, it is clear that Europe still has its weaknesses, especially in some countries' banks - Italy and Germany's Deutsche Bank most notably.

The dollar has also strengthened against major currencies. The pound fell 1.1% to $1.2464. Currencies in many emerging markets - from the Mexican peso and Malaysian ringgit, to Turkey's lira and South African rand - fell on fears that protectionism and higher US interest could suck investment from these markets.

"Clearly the market has settled on a 'buy dollar' theme, on the basis there will be a debt-fuelled US fiscal binge that will push up inflation," said TD Securities' European head of currency strategy Ned Rumpeltin.

"There are signs that higher bond yields and the knock of a stronger US dollar are having a domino impact, taking down the weakest risky assets first, before moving on to the next," said Deutsche's global co-head of foreign exchange, Alan Ruskin.

And a senior European Central Bank (ECB) official has warned that the uncertainty caused by sudden swings in the financial markets threatened economic recovery.

Speaking in Frankfurt on Monday, ECB vice-president Vitor Constancio said: "We should be cautious in drawing hasty, positive conclusions from those market developments, because they may not necessarily indicate that the world economy will have an accelerating recovery with higher growth." </s> Dallas Federal Reserve President Robert Kaplan on Friday repeated his call for immigration reform, continued trade with Mexico and more global integration as ways to counter slow U.S. economic growth.

"I'd love to see our country make the right decisions on how we think about trade," Kaplan said at a meeting of the Park Cities Rotary Club in Dallas, adding that running a trade deficit with Mexico is different from running a trade deficit with some other countries like China because trade with Mexico boosts jobs and competitiveness in the United States.

The U.S. also needs to "come to grips" with immigration reform, he said, because immigrants have historically been big contributors to U.S. labor force growth. (Reporting by Ann Saphir; Editing by Chizu Nomiyama) </s> WASHINGTON — The Federal Reserve is raising a key interest rate for the first time in a year, reflecting a resilient U.S. economy and expectations of higher inflation. The move will mean modestly higher rates on some loans.

The Fed signaled in a statement Wednesday that additional rate increases will likely be made slowly as the economy improves and inflation edges closer to the Fed’s 2 percent target.

The central bank is increasing its benchmark rate by a quarter-point to a still-low range of 0.5 percent to 0.75 percent. The Fed last raised the rate in December 2015 from a record low near zero set during the 2008 financial crisis.

President-elect Donald Trump’s plans for tax cuts and infrastructure spending have led investors to expect that inflation will pick up in coming months.

The economy, after growing at an anemic annual rate of 1.1 percent in the first half of this year, accelerated to a 3.2 percent pace in the July-September quarter. That pickup has lifted hopes that the economy will keep rising, fueled by steady hiring gains. The unemployment rate is at a nine-year low of 4.6 percent.

In the month since Trump’s victory, investors have sent stock prices surging to record highs and driven up bond yields. The markets have calculated that Republican control of Congress will enable Trump to cut taxes, ease regulations and accelerate infrastructure spending — and that higher economic growth, inflation and corporate profits will result.

The Fed’s action Wednesday should have little effect on mortgages or auto and student loans. The Fed doesn’t directly affect those rates, at least not in the short run. But rates on some other loans — notably credit cards, home equity loans and adjustable-rate mortgages — will likely rise soon, though only modestly. Those rates are based on benchmarks like banks’ prime rate, which moves in tandem with the Fed’s key rate.

Mortgage rates have been surging since Trump’s election victory last month on expectations that his economic program will accelerate economic growth and inflation.

Some Fed watchers expect faster growth to lead the central bank to shift its focus from trying to energize the economy to considering ways to counter the risk of too-high inflation. On that assumption, some are revising their forecasts for Fed rate hikes in 2017.

Arvind Menon, CEO of Las Vegas-based community bank Meadows Bank, called the decision a win for retirees living on savings and a hitch for businesses with adjustable loan rates, ones close to the limits of qualifying for a loan and ones hoping to refinance a loan.

For homeowners, fixed-rate loans and ones with lengthier periods before rates are adjusted are still attractive, he said.

Projects in the Las Vegas area already under construction are likely safe to continue because the financing for the projects is locked in, Menon said. For future projects, slow increased by the Fed in 2017 should give businesses time to factor higher interest payments into their plans.

“The rates should go up incrementally, meaning we will not see a big, immediate difference,” Menon said.

The Fed will want to see wages grow before its next interest increases in 2017, said Greg McBride, chief financial analyst for Bankrate, a New York-based financial services company.

The American economy is ready to ease into normal interest rates and that Trump’s election hasn’t disturbed that momentum yet, McBride said. The Fed’s governors will need to see the inflation-stoking policies he proposed on the campaign trail in legislative writing before deciding to raise rates faster, McBride said.

“It’s time to wean the patient off the medicine of near-zero interest rates,” McBride said. “You have to do so gradually so as to not disrupt the recovery.”

Some Fed watchers believe low interest rates could be the new normal, UNLV professor and director of the university’s business and economic research center Stephen Miller said.

Locally, high new house prices compared to existing homes signals the valley economy is still recovering, he said.

But a low national employment rate will continue to tell the Fed that businesses and individuals can handle rate increases.

“The hope is they are staying ahead of the curve,” Miller said.

The Associated Press contributed to this report.
Robert Kaplan, head of the Federal Reserve Bank of Dallas, says that low bond yields suggest sluggish growth ahead for the economy of the United States.