Traders Once Again Betting Fed Is More Likely To Hike Than Not
The bond market has resumed pricing in better-than-even odds of a Federal Reserve rate hike next week, following Monday’s historic collapse in yields fueled by speculation that a spate of bank failures in the past week would stay the central bank’s hand.
(Bloomberg) -- The bond market has resumed pricing in better-than-even odds of a Federal Reserve rate hike next week, reversing much of the historic collapse in yields Monday fueled by speculation that a spate of bank failures in the past week would stay the central bank’s hand.
The repricing was underway before the release of February inflation data that was mostly in line with expectations, and the data had little immediate effect. However the two-year Treasury yield, which tumbled 61 basis points on Monday, reached a session high near 4.40% in early afternoon in New York, higher on the day by 41 basis points.
Swaps traders upgraded the odds of a Federal Reserve rate hike next week to around 80% from around 50% at Monday’s close. Those odds only briefly edged higher after the core consumer price index rose slightly more than economists estimated, while still showing slower year-on-year rates compared with January.
“The way financial markets are performing early today, in tandem with the data, should add to the probability of a 25 basis point hike in March, but only at margins,” said Alan Ruskin, chief international strategist at Deutsche Bank.
The Treasury market in the past week has undergone a seismic shift, with two-year yields reaching a multi-year high of 5.08% on Wednesday after Fed Chair Jerome Powell said he was open to re-accelerating the pace of rate hike’s from January’s quarter-point increase if warranted by economic data.
Monday, the two-year yield dipped below 4% as investors continued to dump US bank shares despite a rescue plan announced by regulators late Sunday, and it touched 3.82% in early European trading, breaching its 200-day moving average for the first time since mid-2021. Bank share prices rebounded Tuesday, with the KBW Bank Index up more than 4%, paring its slide since March 6 to about 22%.
The financial turmoil spurred several Wall Street banks to change their forecasts for next week’s Fed meeting. Goldman Sachs, NatWest Markets and Barclays dropped calls for a March rate hike, while Nomura Securities predicted a rate cut next week.
Meanwhile inflation continues to run much hotter than the Fed’s 2% target rate. The consumer price index rose 6% year-on-year in February, down from 6.4% in January. The core CPI eased to 5.5% from 5.6% despite rising 0.5% for the month, a tenth more than economists estimated.
“Our view is that ultimately the ring fencing works and the Fed goes back to hiking interest rates,” Ethan Harris, head of global economics research at Bank of America Corp. said on Bloomberg television, referring to the regulatory response to the bank failures. “Ultimately the Fed is going to end up having to fight inflation.”
--With assistance from .
(Updates yield levels, adds forecasts for March Fed meeting.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.