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A shift in sentiment on Federal Reserve policy is emerging in interest-rate options, where several big wagers on the central bank’s benchmark rate reaching 6 percent — nearly a percentage point higher than the current consensus — have popped up this week.
The thinking behind them flies in the face of what has been an article of faith over the past two months: that the Fed, after raising rates eight times in the past year, is near the end of its tightening cycle.
Already, rates are high enough to cause a recession that will require the central bank to reverse course this year, the thinking goes.
But strong January employment data released Friday challenged that thesis, and comments by Fed officials this week have eroded it further.
Now, a pause after just one or two more rate hikes is not looking like such a done deal.
On Tuesday, a trader amassed a large position in options that would make US$135 million if the central bank keeps tightening until September.
Buying of the same structure continued Wednesday, alongside similar bets expressed in different ways.
Preliminary open-interest data from the Chicago Mercantile Exchange confirmed the US$18 million wager placed Tuesday in Secured Overnight Financing Rate options set to expire in September, targeting a 6% benchmark rate.
That’s almost a full percentage point more than the 5,1 percent level for that month currently priced into interest-rate swaps.
Buying of the position was ongoing throughout Tuesday’s session, though it ramped up significantly in the afternoon via block trades after Fed Chair Jerome Powell suggested the latest monthly jobs numbers may necessitate more tightening than previously anticipated. – Bloomberg
Online Reporter