Bond Traders Swarm 2019 Fed-Hike Bets After Inflation Surprise

Eaton Vance's Stein Sees Higher Treasury Yields, Weaker Dollar

Bond traders, seeking a way to bet on more Federal Reserve rate hikes, are setting their sights on 2019.

After a Wednesday report showed consumer prices rose in January by more than projected, traders used eurodollar futures to express their view that central bankers have a clearer path to tighten. The expected number of increases from now until the end of next year is up to four, from 3.6 before the inflation report. In contrast, the odds of a move in March haven’t changed much, rising to about 90 percent from around 85 percent ahead of the data.

The reason for ramping up bets for 2019, traders say, is simple: That’s where the value is. Overnight index swaps are already pricing in about 2.6 Fed increases in 2018, while the median projection among policy makers is for three. By contrast, the swaps were only signaling 1.2 moves in 2019 before the inflation data, while central bankers expect between two and three. The swaps now indicate about 1.4 hikes. If the Fed stays the course, that number has room to rise.

Eurodollar spread steepeners, which count on more rate increases priced in between the two contracts, are how many traders are making bets. More than 120,000 contracts traded Wednesday on the spread between December 2018 and December 2019 contracts. The vast majority of the volume came after the consumer price index data.

    Before it's here, it's on the Bloomberg Terminal.