THE debate over the magnitude of the Federal Reserve’s expected interest-rate cut in November is intensifying, with traders ramping up wagers in futures keyed to the central bank’s path as officials start to weigh in on their next move.
After weaker-than-expected US consumer confidence data on Tuesday (Sep 24), investors leaned a bit more towards a second straight half-point easing at the Nov 7 decision. The upshot is that it’s essentially become a coin toss in the swaps market between another outsized reduction and a more standard quarter-point move.
Swaps traders are now pricing in approximately three-quarters of a point of total cuts over the remaining two Fed decisions this year – with the second one coming Dec 18 – implying a half-point move at one of the gatherings.
“We are increasingly in that 50-basis-point camp,” said Nathan Thooft, a senior portfolio manager at Manulife Investment Management in Boston. “Although officially we have not changed our stance, which is two-quarter points this year – so one in November and one in December.”
Positioning figures show the rates market has started gearing up for Nov 7 since last week’s decision. Open interest in two-year note futures has increased sharply. The amount of positions held by traders in the maturity, which closely follows the Fed’s anticipated trajectory, has climbed to around 4.4 million contracts for the December 2024 tenor, the most yet. There’s also been a marked uptick in wagers in December futures linked to the Secured Overnight Financing Rate (SOFR).
However, with various policymakers sending mixed signals on the November meeting, traders are stopping short of betting heavily in one direction at this point. That’s unlike the leadup to the Fed’s half-point cut on Sep 18, when futures bets were favouring that size of a reduction.
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On Tuesday, Fed governor Michelle Bowman said the central bank should lower rates at a “measured” pace after two other officials downplayed the odds of a half-point cut the day before. Meanwhile, the Chicago Fed’s Austan Goolsbee said rates need to be lowered “significantly”.
Meanwhile, in cash Treasuries, the bullish momentum leading into last week’s Fed meeting remains intact, with JPMorgan Chase’s Treasury clients holding net long positions steady in the week to Sep 23. The yield on the benchmark 10-year note drifted up around a dozen basis points in the period to about 3.73 per cent as the bond market’s big curve-steepener trade gained steam following the Fed’s rate cut.
Here’s a rundown of the latest positioning indicators across the rates market:
JPMorgan survey
In the latest week, JPMorgan Treasury clients increased both outright longs and shorts by two percentage points, leaving the net long position unchanged at six percentage points. The all-client outright shorts are now the highest in a month.
Asset managers, hedge funds long SOFR futures
Positioning in SOFR futures remains net long for both asset managers and the leveraged-fund community, signalling that they are preparing for more rate cuts.
In the week to Sep 17, the day before the Fed lowered rates, asset managers increased net longs by around US$2 million per basis point in risk while hedge funds unwound roughly US$2.6 million per basis point in SOFR futures longs, Commodity Futures Trading Commission data show.
In Treasury futures, over the reporting week asset managers extended net duration long by around 135,000 10-year note futures equivalents while hedge funds extended their net short by almost 300,000 10-year equivalents
Most active SOFR options
Over the past week, the 98.75 SOFR options strike has been one of the most active. That’s due to a large dovish position built in the Mar25 calls via SFRH5 97.75/98.75 2×3 call spreads, where around 80,000 of a long position has formed. Additional position adds have been seen in the 95.75 strikes with large gains in Dec24 puts after recent flows including the buyer of SFRZ4 96.00/95.75 1×2 put spreads.
SOFR options heatmap
In SOFR options out to the June 2025 tenor, the 95.50 strike remains the most elevated with a vast amount of both Dec24 calls and puts occupying the level. There has been some recent outright buying of Dec24 95.50 puts adding to open interest in the strike. There has also been elevated downside activity over the past week including SFRZ4 95.625/95.50 put spread bought with SFRZ4 95.5625/95.4375 put spread at 1.
Options premium remains close to neutral
The premium paid to hedge the market continued to hover near neutral over the past week across the front-end out to intermediate tenors, after spiking a few weeks ago to favour a call premium as traders looked for a continued market rally. In the long end of the curve, the premium is starting to rise to hedge a sell-off, shown by the negative skew on the long-bond call/put spread as traders anticipate a steeper curve. BLOOMBERG
