Traders in the U.S. interest rate market have begun betting on the possibility that the U.S. monetary authority, led by Federal Reserve Chairman Jerome Powell, will hold off on lowering interest rates this year.
The US economy remains resilient and inflation is slowing down. In response to the current situation, financial authorities have recently indicated that they expect to keep policy interest rates high for a longer period of time. As a result, a wide range of hedging instruments are being affected.
Ahead of the Federal Open Market Committee’s May 1 policy decision, traders are targeting a scenario in which the authorities leave interest rates on hold until after the FOMC meeting in December, with collateralized next-day bonds closely tied to policy rates. The company is building options positions related to the Sourcing Rate (SOFR).
In a more drastic bet, there are moves to hedge against the possibility that the monetary authorities will raise interest rates one more time in 2024.
In any case, this is more hawkish than the consensus forecast priced into the swap. In the swap market, interest rates are expected to be cut by about 40 basis points (bp, 1 bp = 0.01%) by the end of the year, approximately twice by 0.25 points each.
This confidence that the financial authorities will ease in the future is thought to have led to strong demand for the $69 billion (approximately 10.68 trillion yen) two-year U.S. bond auction held on the 23rd. .
But some traders are bracing for further weakness after this month’s sell-off in U.S. Treasuries sent yields on various maturities to their highest levels this year.
A notable trend in the U.S. Treasury options market on Monday was an $11 million bet that the yield on the 10-year Treasury note, currently about 4.6%, would rise above 5% within a month. In the cash market, JPMorgan Chase & Co.’s latest customer survey showed neutral positions at their highest level in two months.
Meanwhile, the continued release of better-than-expected inflation data has caused confusion in futures positions. Asset managers have gone net-long in two-year and five-year Treasury futures, the most on record, according to data from the U.S. Commodity Futures Trading Commission (CFTC).
Bank of America (BofA) said the change likely reflects a move to unwind short positions as yields soar.
JPMorgan Treasury All-Client Positioning Survey
Client net long positions rise to most in three weeks
Source: JPMorgan, Bloomberg
Original title: Traders Add Bets That Fed to Skip Interest-Rate Cuts This Year (excerpt)
Tags: Building position postponement interest rate cuts year Interest rate market response economic price trends Bloomberg
