March Rate Hike Suddenly Real for Traders Ahead of Trump Speech

(Bloomberg) -- The bond market just woke up to the idea the Federal Reserve could raise interest rates in just over two weeks.

Fed Chair Janet Yellen and her colleagues have been warning that every meeting is “live,” including the March 14-15 session. Yet the market had remained unconvinced the central bank was ready to move so soon –- until now. The odds of an increase jumped to 50 percent on Monday, a 10-point climb from Friday.

Futures contracts and interest-rate swaps indicate traders see at least a 50 percent chance policy makers will act, based on data compiled by Bloomberg. The odds were less than even just last week. President Donald Trump is preparing to outline spending plans in a speech Tuesday night in Washington, bolstering speculation the economy is about to pick up.

“The probability of a hike is going up,” said Hideaki Kuriki, a debt investor in Tokyo at Sumitomo Mitsui Trust Asset Management Co., which oversees $72.6 billion. “Investors expect a new policy from Trump. I still think the first hike will be in June.''

Jeffrey Rosenberg at BlackRock Inc. and Mohamed-El Erian at Allianz SE last week joined Fed officials in saying traders haven't been doing enough to prepare in case the central bank moves. The idea began to spread that trader reticence would preclude a change in policy. The bond market may even have a “veto'' over the Fed, said Jim Bianco, a three-decade industry veteran.

Fed Dallas President Robert Kaplan pushed back against that thesis Monday by saying policy makers should raise interest rates “sooner rather than later,” and without paying excessive attention to market expectations. Kaplan votes on Fed policy this year. 

Futures markets have fluctuated this month on the chances of a March rate increase. The odds jumped to 44 percent on Feb. 15, from 34 percent a day earlier, before sliding back down over the following two days.

It'll be up to Yellen to clarify her plans in a speech Friday.

“The market's a bit confused about March,'' said Peter Jolly, the head of market research at National Australia Bank Ltd. in Sydney. “Janet Yellen is going to have to make the case for it if that's what they want to do. I'd still be betting against March.”

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Garfield Reynolds, Shikhar Balwani