(Bloomberg) -- The bond market isn’t fully buying the hawkish shift from Federal Reserve officials in recent days.
Eurodollar futures traders continue to wager that a full 25 basis point interest-rate increase will come in 2023 at the earliest, despite a chorus of Fed policy makers this month raising the prospect that the central bank could begin dialing back monetary stimulus sooner than expected.
For some on Wall Street, the dovish pricing across the front-end is an opportunity. Eurodollar options have shown consistent demand for downside wagers targeting a more aggressive Fed ramp up in 2023 and 2024. And Morgan Stanley is standing firm on its much talked about eurodollar steepener trade that would profit should traders start to price in a greater rate-hike premium. The wager suffered heavy losses throughout July amid concern a coronavirus resurgence could slow the economic recovery and delay the Fed’s liftoff.
Central bank officials have been hotly debating when and how to begin paring the extraordinary stimulus unleashed in response to the Covid-19 pandemic. Vice Chairman Richard Clarida’s hawkish remarks last week helped fuel a re-pivot in eurodollar futures back to early 2023 from June 2023. Just today, Federal Reserve Bank of Atlanta President Raphael Bostic said policy makers should begin raising rates as soon as next year.
It all could come to a head at the Jackson Hole symposium in late August, where traders will be on high alert for more details on the Fed’s bond tapering plan and subsequent rate-hike path.
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