There were signs traders in the futures market were protecting against a dovish surprise this week. — Bloomberg
NEW YORK: Bond traders are stepping up options wagers that the Federal Reserve (Fed) will deliver at least one half-point interest rate cut across this year’s three remaining policy meetings.
Officials are projected to lower borrowing costs this week for the first time in 2025, with a quarter-point reduction seen as the most likely decision.
But a cooling labour market is leading some traders to hedge against the risk that a souring economic outlook leads to bigger moves in the coming months, even as inflation remains sticky.
Trading flows this week linked to the Secured Overnight Financing Rate (SOFR), which is highly sensitive to expectations for Fed policy, have indicated rising demand for wagers around December options, which expire two days after the Fed’s Dec 10 announcement.
The positions stand to benefit from as many as two half-point cuts, or three quarter-point moves across the September, October and December announcements.
The trades reflect a more dovish path than currently seen in swaps, which are pricing in roughly 70 basis points of easing through the December gathering.
Of course, the risk for wagers on steeper cuts is that Fed chair Jerome Powell signals a more cautious trajectory, with the ultimate impact of tariffs on consumer prices still unclear.
Standard Chartered economists expect a half-point “catch-up” cut given the weakness in job growth, they wrote in a note.
However, they said, Powell is unlikely to be forthcoming on further easing, with officials split on subsequent moves.
There were signs traders in the futures market were protecting against a dovish surprise this week.
Monday’s session saw the largest-ever block trade in fed funds futures, tallying 84,000 contracts, indicating demand for a hedge against a half-point cut.
The futures, which serve as guidance on the path of the Fed’s overnight benchmark, began trading in 1988 on the Chicago Board of Trade.
Traders adding dovish Fed bets likely also have in mind the pressure coming from the White House.
President Donald Trump has repeatedly criticised Powell as being too slow to cut rates.
And this meeting, his economic adviser, Stephen Miran, newly confirmed as a Fed governor, will participate.
In the week to Sept 15, JPMorgan’s treasury client survey showed short positions dropping two percentage points, shifting into neutrals with longs unchanged.
The weekly moves saw the all-client net long position at the highest since Aug 25.
In secured overnight financing rate options across Dec 25, March 26 and June 26 tenors over the past week there was a heavy amount of new positioning centred around the 96.50 strikes due to activity in Dec 25 calls and puts, along with June 26 puts.
The strike has been the focus of multiple call condor trades in Dec 25 options recently, which look to target 25-basis-point rate cuts at each of the three remaining Fed meetings this year.
In SOFR options across Dec 25, March 26 and June 26 tenors, the 96.50 strike is the most populated and has seen heavy activity over the past week.
The majority of the strike is populated within Dec 25 calls, in positions which look to target half-point rate cuts at one of the remaining Fed meetings this year.
The 95.625 strike is also heavily populated, due to a large amount of open interest in Dec 25 puts around the strike.
Treasury options skew continues to trade around neutral across the curve, with the long-end recently flipping from favoring put premium a couple of weeks ago.
Recent options flow in treasuries has included a US$27mil strangle seller via December options.
In the week ending Sept 9, asset managers were bullish in the long-end of the curve, according to CFTC data, adding to net long positions across both long-bond and ultra-long bond futures.
On the flip-side, hedge funds added to net short positions from two-year note futures out to the 10-year note contracts. — Bloomberg
