(Bloomberg). — There is increased speculation in the money markets that the Federal Reserve may give its borrowing rates a major boost for just the second time in as many decades.

Although a quarter-point rise is the likely scenario, swap market prices now include more than 25 basis point of tightening before March’s end. With no move anticipated at this month’s meeting, that suggests traders are at least contemplating the possibility of a 50-basis-point move in March. The Fed hasn’t tightened that much in one shot since May 2000, when the central bank’s tightening cycle was already well underway. 

A heightened expectation of a larger rate hike has fuelled the selloff in Treasury market Tuesday, which caused benchmark yields surge. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon last week warned that Fed tightening might not be as “sweet and gentle” as some expect, while billionaire investor Bill Ackman said the central bank should raise its key interest rate by 50 basis points in March to “restore its credibility.”

The latest CFTC position data showed that hedge funds had extended their net eurodollar short positions the greatest since December 2018. Further out, speculators further to the curve are now the net-shortest 10-year note futures. This is in contrast with the previous week. 

Options structures to protect against Fed increases have been highly in demand on the eurodollar market. The options volume is higher than normal. The June options contract has seen a significant increase in positions, and will pay out if the Fed raises rates by 50 basis point at its March meeting. 

Fed-related swaps are currently showing 26 basis points tightening March, and an entire percentage point total for 2022.

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