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Risk Inflation Spurs Bond Traders to Prepare for Heightened Rate-Hike Speculations

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Bond Traders Bet on Fed Interest-Rate Hikes

Bond traders are increasingly betting that the Federal Reserve will continue with its interest-rate hikes. The upcoming monthly consumer-price index report will play a key role in determining if these bets are accurate.

Insight into Inflation and Monetary Policy

The consumer-price index report, which will be released next week, will provide insight into inflation and how much further the central bank needs to go to bring it back to its target. Economists are predicting the biggest monthly jump in 14 months, and the swaps market is pricing in the risk of even higher inflation than expected.

The figures from the report could have a significant impact on the Treasury market, which has been volatile due to the strong pace of economic growth and anticipation of tight monetary policy for a longer period than anticipated.

Conflicting Signals

While signs of a cooling labor market initially suggested that the Fed may be done with rate hikes, futures traders believe there is a 50% chance of a rate increase in November. This uncertainty has led to three consecutive annual losses for Treasuries as yields remain near pre-financial crisis levels.

Leslie Falconio, head of taxable fixed-income strategy at UBS Global Wealth Management, says the CPI data next week will provide more clarity on the Fed’s likely path.

Inflation and Interest Rates

The pace of inflation has remained above the Fed’s 2% target, despite decreasing from last year’s high. The consumer price index is expected to have accelerated to 3.6% in August compared to the previous year. However, on a month-to-month basis, the overall CPI is forecasted to increase by 0.6%, the largest jump since June 2022.

Fed officials have expressed concerns about upside risks to inflation and the possibility of keeping interest rates elevated even after they stop raising them.

The Fed’s Monetary Policy

New York Fed President John Williams stated that monetary policy is currently in a good place, but further decisions will be based on incoming data. The Fed increased its benchmark rate in July to the highest level in 22 years and has not ruled out another rate increase this year.

Market Uncertainty

The bond market remains uncertain about whether the Fed’s rate has peaked. Additionally, investors are trying to gauge how much the Fed can ease policy next year considering the strength of the economy and lingering inflation pressures.

The Treasury market is also dealing with an influx of new debt sales to cover the growing federal budget deficit, which contributes to upward pressure on long-term yields. Traders are pulling back from long-dated bonds, expecting yields to increase after the Fed shifts towards easing monetary policy again.


The upcoming consumer-price index report will be crucial in determining the Fed’s future interest-rate hikes. The bond market is eagerly awaiting the data to gain insights into inflation and the central bank’s monetary policy.

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