(Bloomberg) -- The U.S. bond market stands on the cusp of pricing in the prospect of the most aggressive rate hike seen from the Federal Reserve in nearly three decades.
For the first time this year, traders are pricing in a near-equal chance that Fed policy makers in June will raise their benchmark rate by 75 basis points, following the half-point move that’s expected at their meeting next week. The Fed hasn’t done a 75-basis-point increase since the aggressive tightening cycle of 1994 that was followed by modest rate cuts in 1995 amid a steady economic expansion.
Swap contracts for June were pricing in 111 basis points of tightening, 11 basis points beyond the full percentage point of hikes already expected in May and June combined. Earlier this week, 106 basis points were priced in.
Data showing a record rise in employment costs in the first quarter sparked a flurry of selling in short-dated interest-rate contracts and the policy-sensitive two-year Treasury note Friday.
Elevated inflation pressure suggesting the central bank is well behind the curve has prompted traders to expect four half-percentage hikes through the central bank’s September meeting. Traders have also pushed up expectations that the central bank will raise policy rates to a peak of 3.30% by the middle of 2023, beyond the Fed’s own forecast of 2.8% for the current cycle.
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