Traders boost bets that Federal Reserve will cut policy rate in June

Traders on Friday increased their bets that the Federal Open Market Committee will cut their benchmark policy rate in June as investors still worry about the bank turmoil that’s led to two U.S. banks collapsing and a Swiss bank’s forced merger with its larger rival.

The odds of a 25-bp cut in June surged to almost 60% on Friday from 30% on Thursday, according to the CME FedWatch tool, even after Federal Reserve Chair Jerome Powell said on Wednesday that a rate cut this year is not his base case. He also said that if the Fed needs to raise rates higher, it will.

The swing in sentiment comes as Deutsche Bank’s (DB) five-year credit default swaps, a kind of insurance against bond default, at one point jumped more than 220 basis points in Friday trading. That indicates that traders are worried that Deutsche Bank (DB) could also get caught up in the recent bank turmoil that has had depositors pulling funds from certain banks.

Banking stocks are dropping in Friday premarket trading, with the SPDR S&P Bank ETF (KBE) off 2.2%.

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