Traders Are Betting The Fed Will Hike Rates By A Half-Point In March

(Bloomberg) -- Bond traders boosted bets that the Federal Reserve may re-accelerate the pace of rate increases at the policy meeting later this month, after central bank head Jerome Powell said he’s ready for faster monetary tightening if economic data warrants.

Interest-rate swaps Tuesday showed a shift in bets for the March 22 meeting, with a half-point hike being seen as slightly more likely than a quarter-point move. Traders are betting that the Fed will raise the key borrowing costs by 100 basis points over the next four meetings to a peak just below 5.6%.

Yields jumped across the Treasury curve, although the front-end led, deepening the inversion of the keenly watched two-year to 10-year gap to a level unseen this cycle. Other parts of the yield curve have also inverted further. The 30-year yields are 106 basis points below two-year rates, marking a record gap between the two.

The dollar also jumped, while US stocks dropped.

In prepared testimony before the Senate Banking Committee, Powell said the US central bank is likely to raise interest rates higher than previously thought. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase” the pace of rate hikes, he said. 

“He has double doses of hawkishness with potentially higher peak rates and faster pace of hiking,” said Tracy Chen, a portfolio manager at Brandywine Global Investment Management in Philadelphia. “His 25bps step-down might be premature, given the recent inflation data. This adjustment should lower the risk of Fed falling behind the curve again.”

Two-year yields jumped about 7 basis points to 4.96%, while 10-year yields rose 2 basis points to 3.98%. At one point, the gap between the two notes widened as much 99 basis points, the deepest inversion since 1981. 

(Updates with details throughout.)

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