Fed Swaps Once Again Show Hike More Likely Than Not for May

Benjamin Purvis and Liz Capo McCormick, Bloomberg News

The Marriner S. Eccles Federal Reserve building in Washington, D.C., U.S., on Saturday, June 26, 2021. The Federal Reserve might consider an interest-rate hike from near zero as soon as late 2022 as the labor market reaches full employment and inflation is at the central bank's goal. Photographer: Stefani Reynolds/Bloomberg , Bloomberg

(Bloomberg) -- Pricing of swaps linked to scheduled Federal Reserve meetings now suggest that a quarter-point hike is more likely than not at the central bank’s next meeting in May.

The rate on the contract tied to that gathering rose to around 4.96% on Monday, around 13 basis points above the current effective rate on fed funds, the benchmark targeted by the central bank. The Fed tends to move in increments of 25 basis points — or multiples thereof — so that suggests odds of more than 50% that it will hike.

The most recent upgrading of odds came as short-end Treasury rates jumped Monday amid a more upbeat outlook for US banks. The market has previously suggested more hikes from the Fed, but those expectations were largely wiped out last week in the wake of the Fed’s latest decision, comments from Chair Jerome Powell and ongoing concern about the US financial system.

Meanwhile, Treasury yields jumped, pulling back from their lowest levels of the year, as fears of banking-sector contagion eased amid renewed prospects of further US support for the industry.

The move was led by two-year notes, whose yields climbed as much as 22 basis points to 3.99%, paring the more than 1.5 percentage-point drop since fears of a banking crisis start sweeping through markets early this month.

Smaller yield increases for longer-dated debt less sensitive to Federal Reserve policy moves flattened the yield curve, which had steepened sharply as yields declined.

--With assistance from Elizabeth Stanton.