Traders Pile Into Contrarian Bet That Fed Will Front-Run Cuts

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Traders Pile Into Contrarian Bet That Fed Will Front-Run Cuts

Bloomberg04-18

Open interest surges after record volumes trade in SOFR spreadWager goes against consensus calls for higher-for-longer ratesTraders in the interest-rate futures market are piling into a contrarian bet...

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That recalibration has sparked a rout in Treasuries that drove the US two-year yield to as high as 5% this week.The futures position, a bet that the 2024 contract will outperform the 2025 contract, saw record volumes on Tuesday. A huge gain in positioning Wednesday pointed to new wagers, giving fresh momentum to the trade.Open interest in the December 2025 SOFR futures rose by 133,000, CME data shows, equivalent to a gain or loss of $3.3 million per basis point move. On Tuesday, the 12-month spread breached the 200-day moving average, a level which had held for 10 months.Sentiment favoring interest-rate cuts this year has also been emerging in SOFR options this week, with buying of deep-out-the money calls continuing Wednesday, targeting a central bank rate as low as 3% by the December policy meeting, down from a range of 5.25% to 5.5% now.A sudden downturn in US economic data could warrant a more aggressive path of monetary policy easing than priced over the coming months. The trade may also be targeting the potential for rising inflation expectations beyond this year, a scenario that could see the December 2025 contract underperform and the spread to steepen.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":0},"commentList":[],"hasMoreComments":false,"newsSizeData":{"likeSize":10,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}