BlackRock Says Market Can Take Rate Boost as Treasuries Advance

Wall Street strategists remain divided about whether the Fed will raise rates Thursday

(Bloomberg) — U.S. 10-year Treasuries ended two days of declines asBlackRock Inc., the worlds biggest money manager, said markets would be able to handle an interest-rate increase by the Federal Reserve.

Yields on two-year notes slipped from their highest level since April 2011 as traders awaited the outcome of the Feds two-day policy meeting, where officialsled by Chair Janet Yellen may raise rates for the first time since 2006. BlackRock said market reaction will be driven by the pace of increases rather than the date of the first move. Treasuries held gains after separate reports showed new-home construction fell in August and jobless claims declined last week to the lowest level in two months.

If they did go today I actually think the market could absorb it relatively reasonably, Stephen Cohen, BlackRocks London-based chief investment strategist for international fixed income, said in an interview on Bloomberg Televisions Countdown with Guy Johnson and Anna Edwards. People wont actually remember what the date was, whether it was September or December. Theyll remember what happened afterwards and what is the path of rates from here on. That is going to determine the path of markets.

Wall Street strategists remain divided about whether the Fed will raise rates Thursday. Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein said on Wednesday that U.S. economic data dont support the case for higher rates, after Jan Hatzius, Goldmans chief economist, said the Fed probably wont act amid concern that markets may not be prepared.

Uncertain Signals

The yield on the benchmark 10-year Treasury fell one basis point, or 0.01 percentage point, to 2.28 percent as of 10:08 a.m. in New York, based on Bloomberg Bond Trader data. The yield climbed 11 basis points in the previous two days. The 2 percent security due in August 2025 advanced 2/32, or $0.63 per $1,000 face amount, to 97 15/32.

Two-year note yields dropped one basis point to 0.80 percent, after climbingWednesday to a 4 1/2-year high of 0.815 percent.

While mixed data cloud the economic picture, futures traders and economists are sending different signals about whether the Fed will raise rates.

Traders are pricing in a 30 percent probability of an increase at the meeting concluding Thursday, down from 48 percent on July 30, based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase, versus the current target of zero to 0.25 percent. Investors have dialed back expectations for higher rates since Chinas devaluation last month sparked a selloff in global markets.

At the same time, 54 of 113 economists surveyed by Bloomberg predict some kind of increase.

Mixed Data

Its not clear that its a done deal, said Thanos Bardas, head of global rates at Neuberger Berman, which manages $107 billion in fixed-income assets. He said he thinks that if the Fed does move, it might raise rates by a smaller amount than normal or cut policy makers forecasts for the path of coming increases. The next question for the bond market is where the Fed is going to stop, he said.

Residential starts declined 3 percent to a 1.13 million annualized rate from a 1.16 million pace the prior month that was slower than previously estimated, a Commerce Department report showed Thursday in Washington. Applications for unemployment benefits decreased by 11,000 to 264,000 in the week ended Sept. 12, a Labor Department report showed Thursday in Washington.

So long as were under 300,000, its still reflective of very tight labor market conditions, and it shows that layoff activity is relatively low, said Thomas Simons, a government- debt economist in New York at Jefferies Group LLC.On the housing starts side, obviously a little bit of a disappointment this month from expectations, and also the downward revisions arent great for July, but youre still up 16.6 percent year- over-year for starts, so Im not particularly worried about the housing sector turning around.

–With assistance from Lucy Meakin and Eshe Nelson in London and Alexandra Scaggs in New York.