By Karen Brettell
(Reuters) – Investors stopped pricing for the possibility that the Federal Reserve will adopt negative rates, after a surprisingly strong employment report on Friday boosted expectations that the worst of the economic downturn is in the past.
The U.S. economy unexpectedly added jobs in May after suffering record losses in the prior month, offering the clearest signal yet that the downturn triggered by the COVID-19 pandemic was probably over, though the road to recovery could be long.
The Federal Reserve in March slashed the target range for the federal funds rate that it controls to between zero and 0.25% as part of an emergency response to the coronavirus crisis.
Last month, fed funds futures <0#FF:> began pricing for the possibility of negative rates as worries grew that the U.S. central bank would need to take extra steps to stimulate the economy.
Friday’s jobs report overturned this expectation, with the contracts now showing no probability of negative rates over the coming three years.
“The market thinks that we’ve reached a turning point. There is an expectation that rates could push higher in the near-term,” said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.
Long-dated Treasury yields jumped to more than two-month highs this week as optimism over the economy boosted risk sentiment, and reduced demand for bonds.
Analysts have said that the Fed is unlikely to adopt negative rates on concerns that it would not be effective and would disrupt the large U.S. money markets. Fed officials including Chair Jerome Powell have also pushed back against the prospect.
Investors now appear to have also left the possibility in the rear view mirror.
“You’ve seen the expectation for negative interest rates shift pretty quickly over the last bit of time,” said Chuck Tomes, a portfolio managers at Manulife Asset Management in Boston. “The market has repriced expectations that economic data going forward won’t be as dire as they once were.”
(Additional reporting by Kate Duguid; Editing by Alden Bentley and Chizu Nomiyama)
