Global Rate Bets Evaporate as Traders Ditch Half-Point Fed Move

(Bloomberg) -- Traders are casting aside wagers on rate hikes across the world -- including pricing out unusually large Federal Reserve interest-rate hike in March -- amid concern that the fallout of Russia's invasion of Ukraine will weigh on the growth outlook.

Swaps linked to the Fed's March 16 meeting dwindled to just 22 basis points of tightening on Tuesday. That suggests traders don't even expect a full quarter-point hike -- a contrast from last month, when a half-point move was all but fully priced amid concern over accelerating inflation. Bonds rallied across the curve, led by short-dated tenors.

Likewise, market-implied expectations for Fed rate increases over the course of the year ebbed, leaving 112 basis points of tightening priced in for all of 2022, down from as much as 162 basis points last month. Rate-hike expectations peaked after January consumer inflation rose more than forecast to the highest level since 1982. 

The repricing of the policy tightening outlook in the U.S. is being mirrored in the U.K., where traders also ditched wagers on a half-point hike in March, and the euro area, where pricing for a quarter-point hike has been pushed to 2023. The move has been accompanied by a wave of demand for the safest government debt, as Russia escalated its invasion of Ukraine. 

“There is so much uncertainty on the geopolitical side at the moment,” said Sandrine Perret, economist and fixed income strategist at Vontobel Asset Management. “For the Fed, expectations remain that they will proceed with a rate increase in March, but the risk of having a very large increase has been repriced.” 

In Europe, Italy led a surge in government bonds as traders bet the European Central Bank will put off raising rates until next year. As recently as the middle of last month, they were wagering on two quarter-point increases in September and December, bringing the deposit rate to zero for the first time since 2014. 

The yield on 10-year Italian debt -- among the most sensitive to the prospect of looser policy -- fell as much as 33 basis points to 1.37%, erasing the advance that followed the ECB's hawkish pivot early last month. German 10-year yields fell 21 basis points to minus 0.07%, the largest daily decrease since 2011. 

Apart from pricing out a 50-basis-point BOE rate increase in March, traders also pared bets on tightening for the year, pricing in less than 100 basis points. U.K. benchmark 10-year yields tumbled 28 basis points to 1.13%.

©2022 Bloomberg L.P.