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Traders in the US interest rate market have begun betting that the Fed will not cut interest rates this year. As the US economy shows resilienceSlotomaniafreecoinsdailybonusesProgress on inflation has stalled and policymakers have recently been hinting that they expect to keep interest rates high for longer. This has had a knock-on effect on hedging instruments.
Before the Fed's decision on May 1, traders established option positions related to the guaranteed overnight financing rate (SOFR), which is closely linked to the Fed's benchmark interest rate, which is now betting that the Fed will also keep interest rates stable at its December policy meeting. Some of the more aggressive bets have also hedged against the possibility of the Fed raising interest rates again in 2024.
In either case, this is tougher than the consensus reflected in the swap market. The swap market shows that interest rates will be cut by a total of about 40 basis points by the end of the year, meaning two 25 basis point cuts are more likely. Confidence in an eventual shift to easing helps explain the strong demand for Tuesday's record $69 billion auction of two-year Treasuries.
Still, some traders are preparing for a further fall in Treasuries after the sell-off pushed yields on bonds of all maturities to 2024 highs. The most striking of the Treasury options on Tuesday was a $11 million bet that the 10-year Treasury yield would rise to more than 5 per cent within a month, compared with the current yield of about 4.Slotomaniafreecoinsdailybonuses.6%. In the spot market, JPMorgan Chase's latest customer survey shows that neutral positions are the largest in two months.
At the same time, higher-than-expected inflation figures are disrupting futures positions. Asset managers have shifted to record net long futures for two-and five-year Treasuries, according to data from the Commodity Futures Trading Commission (CFTC). The change may reflect investors pulling out of short positions as yields soar, according to an analysis by Bank of America.
The following is an overview of the latest position indicators in the interest rate marketSlotomaniafreecoinsdailybonuses:
A historic futures shift
While asset managers' net long positions in two-and five-year Treasury futures rose to record highs, hedge funds do seem to hold some positions on the other side. Data from CFTC as of April 16 show that these investors increased their holdings by 30%.Slotomaniafreecoinsdailybonuses.70,000 10-year Treasury futures. Most of the investments are also in two-and five-year government bonds, where leveraged funds now have record short positions.
Asset managers are overall bullish on 10-year Treasury futures, equivalent to holding about 740000 10-year Treasury futures, the highest level in at least seven years. The CFTC data reflect the weekly report, which includes consumer and producer price data.
Treasury customers fell long, while bears rose.
The latest JPMorgan Chase survey shows that long positions fell 4 percent, while short and neutral positions rose 2 percent. The market has not changed much this week as cash investors struggle to cope with safe-haven demand and strong US economic data. The neutral position among clients has risen to its highest level since February 6.
SOFR traders aim for higher policy rates
The options that have seen the biggest increase in risk over the past week include contracts with a strike price of 94.375, a bet on hawkish positions. The target bet on the relevant options is that the yield at the end of the year is about 5.625% to 5.875%, higher than the current effective interest rate of 5.33%. However, it is not all one-way bets. The wind of the exercise price of 96.00 and 97.00 call options increased the most last week, and the spread is aimed at a sharp cut in interest rates by the end of the year.
SOFR hot-selected map
The most crowded SOFR options reached contracts related to the December 24 meeting with a strike price of 95.00, equivalent to a 5 per cent bet, when there were still a large number of open positions in call options related to the meeting on June 24. There were also a large number of open contracts in the 95.50 strike price contracts related to the June 24 meeting, the second largest. Among other options, there are still a considerable number of open put options in the exercise ranges of 94.75, 94.875 and 94.9375 related to the meeting on June 24.
The cost of hedging long-term bond selling is still high.
Although the cost selling of hedging long-term bonds is cheaper than recent highs, it is still expensive compared with the cost of selling short-and medium-term bonds. Recent liquidity in the options market tends to sell Treasuries on a larger scale, starting with a $11 million bet on Tuesday, targeting a yield of about 5.05 per cent on 10-year Treasuries. In terms of long-term bonds, last week's flows included buyers of put options on long-term bonds, with the target for the yield on 30-year Treasuries to rise to 4.9% by the end of the week, up from around 4.73% recently.