As BlackRock (BLK.US) Chief Investment Officer Rick Riedler gains increasing traction as a candidate for the next Federal Reserve Chair, bond futures traders are ramping up bets on a shift towards dovish monetary policy. Recently, fund flows in interest rate futures markets tied to the Fed's policy benchmark rates—the Secured Overnight Financing Rate (SOFR) and the federal funds rate—have accelerated significantly. Concurrently, prediction markets show Riedler's odds of becoming the next Fed Chair have jumped to the top spot. Federal funds futures and SOFR futures positioning data released on Monday indicated a sustained climb in demand for new trades that would profit from a more aggressive interest rate cutting path than what is currently priced in. Notably, the 1-month federal funds futures spread between July and August, and the 6-month SOFR futures spread between June and December, both recorded historically high trading volumes.
As a Wall Street veteran, the market perceives that a Riedler-led Fed would adopt a market-centric policy approach. In September of last year, he advocated for the Fed to implement a more aggressive 50-basis-point rate cut, contrary to the Fed's prior preference for smaller 25-basis-point reductions. He has also expressed opposition to the Fed's practice of using the "dot plot" to provide forward guidance on future interest rate movements. Economists at Evercore ISI, including Krishna Guha, wrote earlier this week: "Riedler's inclination towards dovish interest rate policy could prompt the Fed to implement three rate cuts this year." This view is based on Riedler's perspectives on productivity, inflation dynamics, and labor market pressures.
Currently, pricing in the interest rate swap market suggests the Fed will implement fewer than two 25-basis-point cuts by 2026. However, in the SOFR options market, there has been a recent influx of positions betting on multiple cuts, with traders targeting a federal funds rate as low as 1.5% by the end of 2026—a level significantly below the current swap market pricing of approximately 3.2%. These contracts are traded anonymously, making it difficult to confirm the entities involved or precisely determine the ultimate beneficiaries of these bets.
According to data from prediction market platform Polymarket, investors view Riedler's dovish stance as more pronounced than that of former frontrunner and ex-Fed Governor Kevin Warsh, whose probability of appointment has now fallen to 29%. Earlier this month, following a Trump interview that yielded positive feedback, Riedler's probability of becoming Fed Chair climbed to around 47%. Mohit Kumar, Chief European Strategist at Jefferies, stated: "While Riedler is unlikely to fully align with Trump's views, his policy stance would probably be slightly more dovish compared to other candidates. His appointment could bring credibility to the role of Fed Chair while alleviating some market concerns."
The following is a summary of the latest positioning indicators in the rate market: A JPMorgan survey for the week ending January 26th showed investor sentiment remained unchanged, with long positions holding at a high of 24 percentage points, a level last seen in December. Net long positions were maintained at 5 percentage points. In the SOFR options market, significant new risk exposure was added to contracts with a strike price of 96.5625 expiring in September 2026. Over the past week, call options expiring in March and June saw active trading. Put options expiring in June also added substantial exposure at that strike price.
Popular trading instruments around this strike price include: the SFRM6 96.50/96.5625 call spread, the SFRH6 96.4375/96.50/96.5625 call butterfly, and the SFRM6 96.5625/96.4375/96.3125 put ladder. Additionally, substantial new risk exposure was added to March call options with a strike price of 96.4375. Recently traded instruments also include the SFRH6 96.375/96.4375/96.50 call butterfly and the SFRH6 96.375/96.4375 call spread. More broadly, contracts with a strike price of 96.50 show the most concentrated positioning, with heavy open interest in March and June call options. Recent demand at this strike was evident through trades like the SFRH6 96.375/96.4375/96.50 call butterfly and the SFRM6 96.50/96.5625 call spread.
Positioning is also dense around the 96.75 strike price, where open interest increased over the past week. Notable larger flows included purchases of the SFRU6 96.75/97.00/97.25/97.50 call condor. Last week, the risk premium for hedging long-term U.S. Treasury risk skewed heavily towards put options, coinciding with the 30-year Treasury yield surging to 4.945%, its highest level since last September. As the Treasury market has recently stabilized, this premium has retreated to near neutral levels.
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