Sep 28, 2023
Big Short in Fed Fund Futures Targets a Rate Hike in November
Bloomberg News
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(Bloomberg) -- Traders are starting to bet that the rates market is underestimating the chances of an interest-rate hike at the Federal Reserve’s next policy meeting, which concludes Nov. 1.
Thursday’s CME Group Inc. preliminary open-interest data, which gives an indication of new futures positions, showed a hefty jump in November fed funds futures in the prior day’s trading.
The increase of about 70,000 contracts was consistent with new short positioning, meaning a bet on a higher Fed rate. On the day, a record 238,000 traded in the November contract, surpassing the 233,000 seen Sept. 21, the day after the Fed’s policy announcement last month.
The burst of trading activity around the November meeting comes as rates markets overall are moving to price in the Fed’s message that it intends to keep borrowing costs higher for longer to tame inflation. Yields on longer-term Treasuries surged to multi-year highs on Thursday. In its meeting last month, the central bank penciled in one more hike this year. After the Nov. 1 decision, the Fed also has a policy decision set for Dec. 13.
Fed funds futures trading Wednesday included a huge flow of selling that saw over 100,000 contracts unloaded in the span of a second. The position had a risk weighting of approximately $4.4 million per basis-point move.
Wave of Fed Funds Futures Flow Sees 100,000 Sold Within a Second
Fed-dated rate swaps currently show around 6 basis points of hike premium priced into the November meeting, or roughly 25% of a quarter-point rate increase.
The profit or loss on the position could build quickly. Thursday features appearances by a slew of Fed speakers, highlighted by Chair Jerome Powell at 4 p.m. New York time.
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