Great strides: A jogger passing by the Fed building. Traders are increasingly positioning themselves for roughly 150 basis points of cuts by the central bank’s Jan 29 policy decision. — Reuters
NEW YORK: Traders in the US interest-rate options market are still betting on at least one super-sized Federal Reserve (Fed) interest-rate cut this year – just probably not before the Nov 5 US election.
Ahead of next week’s central bank policy gathering, Fed swaps reflect expectations for a quarter-point cut, with only a scant possibility for something bigger.
Looking out further, it’s a different story.
Recent activity in options linked to the Secured Overnight Financing rate showed that traders are increasingly positioning themselves for roughly 150 basis points of cuts by the central bank’s Jan 29 policy decision.
That’s the same as is currently priced in in by the swaps market.
To implement that amount of easing, officials would, in the absence of an inter-meeting move, have to implement cuts of at least half a point at two of the four scheduled gatherings through January – moves that are bigger than the standard quarter point.
Just weeks ago, traders were loading up on bets for a half-point rate cut this month – or even sooner – on worries a deteriorating US labour market would force the Fed to take rapid action against the threat of recession.
While data since then has allayed those concerns somewhat, traders are still wagering on the possibility that the central bank will need to make some big moves soon.
Even a quarter-point reduction next week would be a milestone, marking the turning point at which Fed central bankers pivot to monetary easing after more than two years of restrictive rate policy.
It will follow potentially market-moving events this week: the US presidential debate between vice-president Kamala Harris and former President Donald Trump, and readings on US inflation.
Already, Treasuries have rallied as traders cemented expectations for imminent Fed rate cuts, sending yields sharply lower.
In the options market, Monday’s session saw a US$9mil trade emerge targeting an increase in the amount of Fed easing being priced in by the March 2025 policy meeting, while a US$3.5mil “premium play” looked to target at least one half-point Fed move at the September or November policy meetings.
Elsewhere, traders in Treasury futures renewed bullish wagers after covering short positions in the aftermath of a key jobs report on Friday.
The bullish setup holds the potential for a reversal, should traders look to lock in profits around next week’s Fed Open Market Committee (FOMC) meeting.
“This remains an environment where longs are vulnerable to profit-taking against a backdrop of cyclically richening as we look towards FOMC,” Citigroup Inc strategist David Bieber wrote in a note. —Bloomberg
