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Wagers on 11th Fed Rate Hike Mount Despite Debt-Limit Paralysis

By: Elizabeth Stanton and Michael Mackenzie

(Bloomberg)–Bond traders stepped up wagers on an interest-rate increase by the Federal Reserve by July spurred in part by surging UK policy-rate expectations after an upside surprise by British inflation data.

Swap contracts temporarily priced in as much as 12-basis points of tightening in June, a new high since the last central bank hike on May 3, despite the persistent threat that lawmakers will fail to raise the US debt ceiling in time to avoid a financial crisis. The July contract was priced for 17-basis points of tightening in late trading. Treasury yields were higher on the day led by policy-sensitive short maturities.

With a little over a week remaining until the projected date when the US government will run out of cash, expectations for a June rate increase may signal faith not only that an agreement will be reached, but that it won’t entail spending cuts that could cripple the economy.

“If the data between now and June 14 warrants another hike, then I think, they do hike,” said Gregory Faranello, Head of US Rates Trading and Strategy for AmeriVet Securities. However, “the debt ceiling ranks high as a risk factor to the outlook.”

Economists at JPMorgan Chase & Co. said Wednesday that the odds of reaching the so-called X-date without an agreement are 25% and rising.