Fed Traders Have Dialed Back Bets on a Supersized March Hike

(Bloomberg) — Swaps traders are now indicating that a quarter-point hike from the Federal Reserve at its March meeting is more likely than an unusual supersized increase of 50 basis points.

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While hotter-than-anticipated U.S. inflation and apparent hawkishness by the central bank had helped spur speculation earlier this month that the larger-sized increase was more likely than not, the recent bout of geopolitically-fueled market risk aversion has brought pricing down and a quarter-point move looks to be the most likely scenario. The lack of any major indication for a larger hike in the recently released minutes of the last Fed meeting have also helped solidify the case for a more standard-sized move.

Tensions around Ukraine and Russia helped fuel a bid for Treasuries Thursday which has seen front-end rates move lower. The overnight-index swap linked to the date of the March Fed meeting now suggests the central bank benchmark then will be around 35 basis points above the current effective rate of 0.08%. With the Fed tending to move in multiples of 25 basis points, that indicated that traders see at least a quarter-point increase as certain, but odds of only around 40% that they will do a 50-basis-point increase in March.

That is a notable change from the just a few days ago. At the start of Wednesday’s session, around 40 basis points of rate hikes were priced into March, suggesting that 50 was the more likely option.

Further out the OIS strip, just over 1.5 percentage points of increase are priced into the December meeting, which represents the equivalent of six quarter point rate hikes. In comparison, around 160 basis points was priced at the start of Wednesday session. The market is also back to repricing a terminal Fed rate below 2%, with the cycle seen peaking around the middle of 2023.

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