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U.S. bonds recover as IMF presses Fed to delay rate hikes until ’16

The early-morning bond market rout reversed after traders reacted to calls from the International Monetary Fund for the Federal Reserve to put interest rate hikes on hold until next year. The yield on the 10-year Treasury hit a fresh 7-month in early trading, ticking up as high as 2.419%, according to Dow Jones. The initial spike was sparked by a selloff in German government bonds, which also reversed course later in the trading session. It has since dialed back to about 2.32%, a massive 10 basis point drop to the downside.2013-11-04T131020Z_8_CBRE99U0VX000_RTROPTP_3_MARKETS-STOCKS_original

A key to the turnaround was the IMF’s move to downgrade the USA’s 2015 growth projections and its message to U.S. policy makers to hold off on rate-hike liftoff until mid 2016 to avoid market disruptions. In the MF’s latest Financial Sector Assessment Program for the U.S., the IMF said: “The FOMC should remain data dependent and defer its first increase in policy rates until there are greater signs of wage or price inflation than are currently evident. Based on the mission’s macroeconomic forecast, and barring upside surprises to growth and inflation, this would put lift-off into the first half of 2016.”

Despite admitting that the causes of the USA’s economic slowdown earlier this year were due to “temporary” factors, the IMF reduced its full-year growth estimate for the U.S. to 2.5%. In advising the Fed to hold off on its first rate hike until next year, the IMF warned that, despite a well-publicized rate-hike payment plan, “higher U.S. policy rates could still result in a significant and abrupt rebalancing of international portfolios with market volatility and financial stability consequences that go well beyond U.S. borders.”

Even if the Fed doesn’t move soon, a stronger economy and higher inflation readings could also cause rates to rise and also cause market volatility “In either case, asset price volatility could last more than just a few days and have larger-than-anticipated negative effects on financial conditions, growth, labor markets, and inflation outcomes,” the IMF said in the report. “Spillovers to economies with close trade and financial linkages could be substantial.”