Trading in options on US short-term interest rates heated up before and after May inflation data released Tuesday, with notable flows including apparent unwinds of wagers on Federal Reserve rate cuts later this year amid continued positioning for a pause in the hiking cycle on Wednesday.
Flows in options on the benchmark Secured Overnight Financing Rate after the inflation data included 100,000 December 2023 call spreads, consistent with an unwind or adjustment of a hedge for Fed rate cuts into year-end.
Ahead of the Wednesday policy announcement, around 3 basis points of rate-hike premium remains priced into the June decision while rate-cut pricing has eroded further — to about 15 basis points by year end.
Meanwhile, JPMorgan’s Treasury client survey continues to show increased appetite for long positions, with the outright level highest since late 2019.
Treasuries were little changed in Asia trading Wednesday as investors waited to hear from the Fed. Yields rose across the curve on Tuesday.
Here’s a rundown of positioning in various corners of the bond market:
JPMorgan Survey Longs Surge
In survey data up to Monday, JPMorgan clients’ outright long position increased to 33 percentage points, the highest since November 2019. Outright longs have risen sharply from around 6 percentage points at the start of the year and 20 percentage points at the end of May.
SOFR Options Active Pre-Fed
Following Tuesday’s May CPI report, traders were heavy sellers of upside options targeting Fed rate cuts by the end of this year and into early next year as the premium for such a move continues to unwind. Large flows were specifically seen in December 2023 options, consistent with unwinding a dovish hedge initiated at the start of June and also some selling of upside in March 2024 tenors. Elsewhere, Monday’s options flow saw traders continue to play for a Fed pause to the rate hike cycle at Wednesday’s policy meeting.
Asset Managers Unwind Futures Longs
In CFTC data for the period ended June 6, asset managers’ net long duration position was cut for the fifth consecutive week. Latest data shows a cut of 32,500 10-year note futures equivalent on the week and a combined cut of 221,839 10-year note futures equivalents over the past five weeks. On the week, hedge funds added to their net short position by 39,000 10-year note futures.
Neutral Treasury Options Premium
After a prolonged period of favoring upside premium, the one-month 25-delta call/put skew remains close to neutral after recently dipping negative for the first time since the start of March. In Treasury options, flows over the past week have included a $8 million short volatility wager via an August strangle sale and a buyer of September puts targeting a 10-year yield rise to around 4.25% by the end of August.
--With assistance from Matthew Burgess.
(Updates with Treasury move in fifth paragraph.)
