On a day when the US unemployment numbers showed a noticeable number of people leaving the workforce amid a pale 138,000 jobs created – expectations were for 185,000 jobs — traders are nonetheless preparing for a 25 basis point increase in the Fed Funds June rate hike.

Traders expect June Rate Hike

Financial analytics firm S3 Partners, Ihor Dusaniwsky, Head of Research, is out with a new report on the topic. He notes that as of Friday afternoon there was a decided move by traders to position themselves before the expected June 14 rate hike when the Federal Open Market Committee meets. Amid a steady chorus of Fedspeak that indicates a rate hike is coming, the market appears prepared.

The most evident market data point that bolsters the notion traders are anticipating a June rate hike is the Fed Funds futures, which now reflect a 90% chance of a rate hike, up from near a 66% expected chance in early May.

While bond prices initially fell after the number – an indication the Fed rate hike might not be such a sure thing – there is nuance in the numbers.

Short interest in lower grade fixed income ETFs declined, the S3 report noted, at a time when shorts increased their holdings in higher grade bond ETFs and investment grade debt such as US treasuries.

“ETF investors are forecasting that the almost certain 25 bp increase in the Fed Funds rate will negatively affect the prices of both the short end and long end of the U.S. Treasury yield curve as well as higher rated corporate bonds,” the S3 report stated.

But the activity is more than just that around the debt market.

June Rate Hike – ETF investors looking to short gold rally

ETF investors are covering their high-yield bets and REIT shorts – both sensitive to debt markets to various degrees – and this is due to an anticipation of minimal downward price pressure on lower rated fixed income securities.