Treasury options traders keep Fed hike on table
Treasury options traders are protecting against everything from multiple interest-rate cuts this year to a hike ahead of the US Federal Reserve meeting this week.
Recent inflation data has remained stronger than had been expected, dimming expectations that the central bank will cut rates any time soon. While short positions in Treasury futures extended last week as yields pushed through fresh yearly highs, options flow has suggested growing uncertainty around the path of the Fed’s monetary policy for this year, with a number of deep out-the-money tail-risk hedges appearing across a number of tenors.
The positioning covers most extreme dovish and hawkish scenarios being priced into this year, including hedges targeting a policy rate as low as 3% by the December FOMC versus around 5% currently priced into the swaps market.
On the flip side, option plays have also targeted rates higher-for-longer over the year and even positioning for one more hike has also been popular over the past week. On Friday, a trader bought March 2025 put spreads targeting the Fed to hold rates steady into 2025.
“It makes sense that the options market should reflect some probability that the next Fed move will be a hike given cuts have been pushed out, but the bar is high for that outcome,” Tanvir Sandhu, Bloomberg Intelligence’s Chief Global Derivatives Strategist, said in an email. “The markets (and the Fed) really needs the data to do the talking on disinflation being back on track.”
Tactical positioning in Treasuries has been aggressively short over the past couple of days, with open interest building in futures as yields have stretched to fresh yearly highs, with the 2-year breaching 5% and 10-year pushing above 4.7% before paring the jumps
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