In the corner of the US interest rate market most affected by the Fed’s policy, there is a bet that if traders increase the timing of the start of the next tightening cycle, it will bring substantial returns.
Trading is carried out through euro-dollar futures options, and in the past week, the size of the transaction has continued to expand.Speed up and Opinion polls show that Democrats are increasingly likely to sweep the White House And Congress in the elections held on November 3. For many investors, this situation will pave the way for large fiscal expenditures, may accelerate the economic rebound from the pandemic, and cause the inflation rate to accelerate toward the Fed’s goal.
of Concentrated bets have spent approximately US$1 million in option premiums, and the maximum potential benefit is approximately US$50 million. If by March 2024, the futures price for the next quarter is equivalent to about three quarters of interest rate hikes, this will prove to be the most favorable, which means that the Fed began to tighten monetary policy a few months ago. In contrast, until June 2024, the euro-dollar market has not even reflected the entire quarter of interest rate hikes. The Fed said it will keep interest rates close to zero until at least 2023.
“Interest rates will affect the pre-contract price of the euro against the dollar in the next one or two years. Can you easily say that the inflation rate will not rise significantly in the next two years?” said Alex Manzara, a derivatives broker of RJ O’Brien & Associates.
The buyer of the option bet began to appear on October 9, when Most of the purchases happened. The position included more than 660,000 options, which caused a lot of attention among traders, as did the total amount involved.
For more information on the transaction structure, please see here.
Stakes are in the buzz of declining activity in the market, partly due to the Chicago trading floor Closed for months in the virus. Since the beginning of this year, there have been 98 daily Eurodollar options trading volumes exceeding one million contracts, of which only 10 have been since the beginning of May.
Disadvantages of $50 million
If the bet cannot be placed before the expiration date of March 12, 2021, the possible loss has attracted attention. If the market moves in the opposite direction and sets prices at the Fed’s negative policy rate, the downside may total about $50 million.
Of course, this is a step that Fed officials have repeatedly stated Don’t want to take it. Moreover, this is hardly the economic result expected by the market, because the stock price is not lower than the historical high. Regardless of the outcome of the election, there may be further stimulus measures.
Click here to learn more about market expectations.
Manzala said: “It will depend on people’s perception.” He said that the idea behind buying such a euro-dollar option structure is “Whoever wins the election, even if they fail to reach a consensus on a stimulus plan, they will There is a massive stimulus package.”
What to see
- Economic calendar
- October 19: NAHB Housing Market Index
- October 20: Building permit; housing begins
- October 21: MBA mortgage loan application; Beige Book of the Federal Reserve
- October 22: The number of weekly jobless claims; Bloomberg economic expectations, consumer comfort; leading index; existing home sales; Kansas City Federal Reserve manufacturing activities
- October 23: Markit American manufacturing, service, integrated PMI
- Federal Reserve Calendar:
- October 19: Chairman Jerome Powell (Jerome Powell) participated in the International Monetary Fund (IMF) cross-border payment group; John Williams of the Federal Reserve Bank of New York; Vice Chairman Richard Clarida; Ming Neel Kashkari of the Federal Reserve Bank of Niapolis; Raphael Bostic of the Federal Reserve Bank of Atlanta; Patrick Harker of the Federal Reserve Bank of Philadelphia
- October 20: Randal Quarles, Vice Chairman of Supervision; Charles Evans of the Chicago Fed; Dalip Singer of the New York Fed; Bostic
- October 21: Loretta Meister of the Cleveland Federal Reserve; Robert Kaplan of the Dallas Federal Reserve Bank of Kashkari; Beige Book of the Federal Reserve Bank
- October 23: Lorie Logan of the Federal Reserve Bank of New York
- Auction calendar:
- October 19: 13 weeks, 26 weeks of billing
- October 20: 119 days, 42 days of cash management notes
- October 21: The 20-year bond reopens
- October 22: 4-8 weeks of billing; 5 years TIPS