Wall Street's largest banks: Winning bets against super-sized Fed hike

Two of Wall Street’s largest banks, Goldman Sachs Group, Inc. and Citigroup Inc., are recommending bets against a super-sized rate hike from the US Federal Reserve (Fed) in March. 

Speculation that the Fed would kick off its hiking cycle with its first half-percentage-point rate increase since 2000 surged on Friday after the Labor Department reported that payrolls expanded at a surprisingly fast pace in January. 

Swaps markets by late Friday gave roughly 50 percent odds to such a move, though they have since eased back to around 32 per cent. 

Analysts from both Goldman and Citigroup said they see such an aggressive move as unlikely and are suggesting trades that would benefit from a more traditional quarter-point jump. Goldman strategists, including Praveen Korapaty, said a way to bet against a 50-basis-point (bp) March jump would be to sell December overnight rate index swaps and buy the June version. That trade would benefit from more rate-hike expectations being priced into the December contract, which would likely happen if the Fed opts for a smaller March move.

Citigroup’s base case is also a quarter-point move at the March meeting, “although the pricing for a 50 bp move is likely to stay sticky”, strategists Jabaz Mathai and Jason Williams said in a note.