NEW YORK - Options on Secured Overnight Financing Rate futures are showing a higher probability that the Federal Reserve could hike interest rates a quarter percentage point this year and next as U.S. inflation and the labor market remain resilient.
Inflation remains stubborn despite slowing late last year after 15 months of aggressive rate hikes that the Fed halted in July. Data on Thursday showed that core U.S. personal consumption expenditures inflation rose 3.7% in the first quarter, after growing 2% in the fourth. The prospect of a no-cut scenario for 2024 is 31%, up from 20% a month ago, BNP Paribas data showed. Chances of the first 25-bp hike in 2025 are at 22%. Volume though is typically thin the further out the curve so that number can change.
The rise in implied volatility in interest rate swaps, a corner in the fixed income space investors use to hedge interest rate risk, has accompanied the increase in rate-hike odds with rising uncertainty over Fed outcomes. So-called receiver swaptions, a type of option that pays off when interest rates fall, are still in demand. In a receiver swaption, the holder of the option chooses to pay a fixed interest rate in exchange for receiving a floating rate.