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Fed Swap Pricing Indicates May Rate Hike Likelihood

Recent Fed swap pricing points to a probable quarter-point rate hike during the Federal Reserve's May meeting amid improved US bank outlook and easing banking fears.

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Fed Swap Pricing Suggests May Rate Hike

Pricing of swaps linked to upcoming Federal Reserve meetings indicates a quarter-point hike is probable at the central bank's next meeting in May. The rate on the contract tied to that gathering rose to around 4.96% on Monday, approximately 13 basis points above the current effective rate on fed funds, the benchmark targeted by the central bank. With the Fed typically moving in 25 basis point increments, this suggests a greater than 50% chance of a rate hike.

Upgraded Odds Amid Improved US Bank Outlook

The recent increase in rate hike odds coincides with a surge in short-end Treasury rates on Monday, driven by a more optimistic outlook for US banks. The market had previously anticipated more rate hikes from the Fed. Still, those expectations were largely erased following the Fed's latest decision, Chair Jerome Powell's comments, and ongoing concerns about the US financial system.

Treasury Yields Rebound on Easing Banking Fears

Treasury yields have bounced back from their lowest levels of the year as fears of banking-sector contagion subsided and the likelihood of additional US support for the industry increased. The upward movement was led by two-year notes, with yields rising as much as 22 basis points to 3.99%, offsetting the more than 1.5 percentage-point drop experienced since the beginning of the month when concerns about a banking crisis began to