Bond traders keep bets on Fed hike in 2026

Bond traders-maintained bets that the Federal Reserve will raise interest rates by the end of the year, even after a soft US core inflation reading eased pressure on Chairman Kevin Warsh to act sooner.Interest-rate swaps showed traders were still pricing in a rate hike by December after the report on Wednesday, while Treasury yields were little changed.

The rate on two-year notes, which are more sensitive to near-term changes in monetary policy, was 4.11%, down from around 4.13% before the figures.

The US dollar slipped.“The biggest takeaway is that it gives the Fed a tiny bit of breathing room,” said Dan Carter, senior portfolio manager at Fort Washington Investment Advisors.

“Another hot month would have put a lot more pressure on them on rate hikes, but this is just soft enough to allow them to wait and see.” The core consumer price index, which excludes food and energy to show underlying inflation, increased 0.2% from April, compared to a 0.3% consensus forecast among economists polled by Bloomberg.Ahead of the report, traders in the options market linked to the Fed-sensitive Secured Overnight Financing Rate had been piling into positions targeting multiple rate hikes in the coming months.

Some had even embraced wagers for a move as soon as September following Friday’s strong US employment report.Those moves capped a repricing in the bond market since late February, when the US-Israel attack on Iran sparked a surge in oil prices.

That upended bets that the central bank under Warsh would be able to lower rates, as Trump has advocated. ...