Investors return from three-day break to a market bracing for more

Evidence of those more aggressive expectations could be seen in fed funds futures, which were pricing in a more-than-100% chance of a 25-basis-point rate hike in March as of early Tuesday, strategists said. That implies some chance of a greater-than-expected 50-basis-point increase, they said — a size that the Fed last delivered in May 2000.

“Now that the Fed has moved away from the idea of transitory inflation and there are geopolitical risks looming over us — with fears of a Russian invasion of Ukraine, which could lead to market stress related to gearing up for war — a 50-basis-point, one-and-done rate hike in March would be seen as a way to acknowledge inflation and see how the market takes it,” Michael Franzese, head of fixed-income trading at MCAP, said via phone.

“A lot of people believe the Fed is behind the eight-ball, and this is one of the things now being floated out there,” he said.

But it doesn’t end there: Expectations are also growing in some parts of the market for a faster winddown of QE purchases — with widening mortgage spreads and chatter among traders suggesting that Fed officials might even accelerate the tapering process to end in February or completely stop in January, said Scott Buchta, senior managing director and head of fixed income strategy at Brean Capital in Chicago. However, Fed officials have gone to some length to dash speculation of a sudden end to asset purchases in January, and traders like Franzese also don’t see an abrupt stop happening. The Fed’s next meeting is Jan. 25-26 in Washington.

Read: Fed to use upcoming policy meeting to get ducks in a row for March liftoff

The recalibration of expectations around the Fed’s most likely path forward has nonetheless been dramatic, taking its greatest hit on bond prices while sending major U.S. stock indexes sharply lower this year. The technology sector felt the most pressure, with the Nasdaq Composite Index
COMP,
-2.26%
falling 1.8% in Tuesday afternoon trading and more than 6% year to date.

Government bonds are off to their worst start to a new year in decades as investors aggressively sell off Treasuries — sending yields soaring in the first 11 trading days of 2022. As of early Tuesday, the 2-Year Treasury yield
TMUBMUSD02Y,
1.042%,
or rate most closely associated with the path of Fed policy, was up 30 basis points, according to Dow Jones Market Data. And the 10-year yield
TMUBMUSD10Y,
1.858%,
which influences the long-term cost of borrowing for consumers, was up 34 basis points. The last time either yield has risen by as much during this same time of the year was in 1982, when the…