MW Stocks and bonds struggle as traders see chances of Fed rate hike soar above 50% - up sharply from earlier this week
By Vivien Lou Chen
There is a 60.4% chance the Fed will to move toward higher rates by October, based on Bloomberg data
Traders are contemplating the growing chances that the Federal Reserve will start hiking interest rates this year.
Higher oil prices resulting from the U.S.-Israeli war in Iran are dashing hopes for any interest-rate cuts by the Federal Reserve this year, and even leading some traders to price in higher expectations for a hike.
Expectations were climbing on Friday as the U.S. began deploying more forces to the Middle East and as Brent crude futures (BRN00), the global oil benchmark, rose above $109 a barrel. The idea of higher interest rates likely comes as a shock to most investors, since it was only a week ago that investors' baseline expectation was for a single quarter-point cut.
Based on Bloomberg data derived from pricing in swaps and fed-funds futures, the market-implied probabilities that the Fed will need to move in the direction of higher rates by October added up to 60.4%. At last check, a hike of 15.1 basis points - or less than the usual move of 25 basis points - was priced in for October. That would bring the implied rate of the fed-funds target to 3.8%. On Tuesday, hardly any rate hikes were expected, Bloomberg's data showed.
Current expectations for higher rates are "entirely attributable to the spike in oil prices because of the dislocations caused by the war," said John Luke Tyner, a portfolio manager at Alabama-based Aptus Capital Advisors. "I would say some of this is impacted by people buying actual fed-funds futures as a cheap hedge on the off chance that the Fed has to hike, and so they can hedge some other exposures in their books. It's not necessarily a firm conviction."
Market-implied views were "moving fast" on Friday, he said, noting that 2.5 rate cuts for 2026 were being reflected in Bloomberg's data as recently as three weeks ago. It's good to be mindful of these views "because it's where real money is placing its bets on the trajectory of Fed policy," Tyner said in a phone interview. However, the war could also end, which could cause rate-hike expectations to be pulled back quickly, he added.
The spike in rate-cut expectations coincided with more pain for stocks and bonds on Friday. The S&P 500 SPX was lower, on track to cement a fourth-straight week in the red, while Treasury yields BX:TMUBMUSD10Y pressed higher, with the 10-year yield heading for its highest level in months. Bond yields move inversely to bond prices.
-Vivien Lou Chen
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(END) Dow Jones Newswires
March 20, 2026 12:33 ET (16:33 GMT)
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