Risk assets like stocks and corporate bonds have lost momentum
Spooked by a flurry of hotter-than-expected U.S. economic and inflation data last month, investors are reviving trading strategies that bet on a higher peak in interest rates.
Bets on the Federal Reserve more aggressively hiking rates have gained more traction in money markets. The probability that the Fed may increase rates to as high as 6% in September, which is when Fed funds futures traders see rates peaking, stood at over 13% on Monday, up from about 8% a week earlier, CME Group data showed.
Trading platform Tradeweb said it saw average daily volume in inflation swaps - derivatives used to hedge inflation risk - increase by 23% month-on-month in February. “While all-in yields look attractive, corporate credit spreads look too tight given that we are likely headed for a downturn amidst restrictive monetary policy,” he said, referring to expectations the tightening could eventually trigger a sharp economic slowdown.
Traders largely expect the central bank to raise rates by 25 basis points, although the probability of a 50-basis-point hike stood at about 30% on Monday, according to CME Group data. A proxy of inflation expectations such as the breakeven rate on 10-year U.S. Treasury Inflation-Protected Securities has gone from 2.12% in January - the lowest in nearly two years - to about 2.5%, its highest since November.
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