(Bloomberg) -- Money markets are reflecting increased speculation that the Federal Reserve might opt for its first super-sized boost to borrowing costs in more than two decades.
While a quarter-point increase is still the most likely scenario, swap markets are now pricing in more than 25 basis points of tightening by the end of March. With no move anticipated at this month’s meeting, that suggests traders are at least contemplating the possibility of a 50-basis-point move in March. The Fed hasn’t tightened that much in one shot since May 2000, when the central bank’s tightening cycle was already well underway.
An increased drumbeat around the prospect of a bigger hike in recent days may have added fuel to the selloff in Treasury markets Tuesday that caused benchmark yields to surge. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon last week warned that Fed tightening might not be as “sweet and gentle” as some expect, while billionaire investor Bill Ackman said the central bank should raise its key interest rate by 50 basis points in March to “restore its credibility.”
Leading into this week, the latest CFTC positioning data had shown that hedge funds extended net eurodollar short positions to the most since December 2018, while further out on the curve speculators are now the most net short 10-year note futures since February 2020.
In the eurodollar market, option structures that protect against Fed hikes have been in demand, with options volumes running at higher than usual levels. Positions have notably amassed in the June options contract, which stand to pay-out should the Fed lift rates by 50 basis points at the March meeting.
Fed-related swaps currently show around 26 basis points of tightening for March and a full percentage point for the whole of 2022.
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