Traders in the US rates options market are embracing a nascent wager on the Federal Reserve’s interest-rate path: a whopping 3 percentage points worth of cuts in the next nine months.
Over the past three sessions, positioning in the options market linked to the Secured Overnight Financing Rate shows an increase in bets that stand to benefit if the central bank reduces its key rate to as low as 2.25% by the first quarter of 2025.
Such an outcome — which appears unlikely unless the US economy tumbles into a sudden recession — would mean at least 300 basis points of easing from current levels. This type of wager could be used to hedge another investment.
It’s an aggressive position given that market participants are pricing in about 75 basis points of easing in that period; that slipped slightly in London trading on Wednesday as Treasury yields rose. Fed officials recently forecast just 25 basis points of reductions by the end of this year and a total of 125 basis points by end-2025.
Investors have been scouring economic data and remarks by Fed officials for clues on the exact timing of eventual Fed easing. Now, some are starting to build up bets that hedge tail-risk outcomes, too — such as rapid and extreme rate cuts. Trading in many of these contracts is anonymous, which makes it difficult to identify the firms behind those bets.
In the fed funds market, traders have been ramping up buying of August contracts that would pay out if policymakers cut at the July 31 policy meeting. Swaps linked to that meeting date, meanwhile, only price in one basis point of a reduction then.
A dovish stance has emerged in the cash market, too, according to JPMorgan Chase & Co. data. The bank’s latest survey of clients showed the biggest net long positions in three months in the week ending June 24.
This article was provided by Bloomberg News.