Hedge Funds Pile Into A Record Hawkish Rate Bet Pre-Jackson Hole
Hedge funds are unleashing record bets that the Federal Reserve will stick to its hawkish script as they position for higher interest rates in the derivatives market.
(Bloomberg) -- Hedge funds are unleashing record bets that the Federal Reserve will stick to its hawkish script as they rapidly position for higher interest rates in a key corner of the derivatives market.
The group has collectively placed a big short across futures referencing the official successor to London interbank offered rate known as the Secured Overnight Financing Rate. This wager stands to benefit should Fed Chair Jerome Powell effectively rule out a dovish pivot at this week’s annual symposium in Jackson Hole.
The net-short positioning hit an unprecedented 695,493 contracts in the latest Commodity Futures Trading Commission data. That’s the equivalent of around $17 million of cash risk on the table per-basis-point move.
The pace at which hedge funds have built up this short position has more than tripled in size over the past month -- even as the broader futures market continues to price in interest-rate cuts by the end of the next year.
Meanwhile in eurodollar futures, short wagers from hedge funds are near this year’s highest levels at just over 2.6 million contracts, on a net basis.
It’s not just the front-end of the curve where traders are positioning for a hawkish outcome into the Jackson Hole meeting. Over the past two sessions, they’ve built up large put structures in 10-year notes -- targeting a move higher in 10-year yields to as high as 3.70% within a month. The buying continued in Monday’s session, although shifting from October options out to November maturities.
The 10-year yield on Monday climbed above 3% for the first time in a month as rates across the curve moved higher. The 10-year rate reached close to 3.01%, while two-year rate hit a high of 3.32%.
Traders Hedge a Bigger Treasuries Selloff in 10-Year Put Options
The fate of these wagers lies in the immediate path of policy rates. The swaps market is roughly pricing in a 50/50 chance that the Federal Reserve will hike by 50 or 75 basis points at the September 21 meeting, leaving the Jackson Hole gathering as a key event to shore up conviction one way or another.
“Market opinion initially was split last week about whether the FOMC minutes were hawkish or dovish,” said Lou Crandall, economist at Wrightson ICAP Llc. “There won’t be any such ambiguity about Chair Powell’s Jackson Hole speech on Friday.”
An inversion of around 30 basis points in the December 2022/December 2023 SOFR futures spread shows expectations that the central bank will be cutting rates by the end of next year.
Wagers on this type of dovish-pivot scenario have diminished somewhat over the past week, however, with the inversion of the one-year curve easing from as much as 75 basis points over a month ago to below 30 basis points currently.
(Updates with Treasury-market moves.)
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