U.S. fed funds futures rally as new virus variant upends Fed hike bets

BY Reuters | ECONOMIC | 11/26/21 12:12 PM EST

NEW YORK, Nov 26 (Reuters) - Futures on the U.S. federal funds rate, which track short-term interest rate expectations, jumped on Friday as a new coronavirus variant detected overseas rocked market sentiment and investors rethought bets the Federal Reserve would move quickly to hike rates to quell inflation.

A near across-the-board jump in CBOE fed funds futures upended market expectations the Fed would raise the fed funds rate from its current 0-0.25% as soon as mid 2022, after it concludes tapering its bond purchase program put in place early in the pandemic.

According to CME's FedWatch tool (https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html) money market traders were pricing in a 58.5% chance of at least a 0.25% hike by the Federal Open Market Committee's June meeting, down from an 82.1% chance Wednesday before the U.S. Thanksgiving holiday, and a 67% chance a week ago, before President Joe Biden renominated Jerome Powell to be Fed chair.

Odds of a hike at the July meeting were at 69%, down from 88% on Wednesday and 77.2% last week. September tightening odds were at 79.7%, down from 94.5% and 88.1%.

By December 2022 the market sees a 92% chance rates will be hiked by at least 25 basis points, versus 99% the prior session and 94% last Friday. (Reporting by Alden Bentley Editing by Chris Reese)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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