Rate Traders Are Busy Pricing a June Fed Hike in Wake of Powell

(Bloomberg) -- Money-market traders are now basically pricing in a full quarter-point rate hike for the June Federal Reserve meeting and there has been a noticeable flurry of activity in eurodollar option plays around that date.

Downside hedging in eurodollars -- which protects traders against increases in short-term rates -- got a jolt after Chair Jerome Powell commented on asset-purchase tapering Tuesday, and that activity has continued into the Wednesday session.

• Wednesday flows have included 20,000 Jun22 99.00/98.50 1x2 put spread bought at 1 , one U.S.-based
  • Also Jun22 99.50/99.25 1x2 put spread bought in 10,000 at 1 and EDM2 99.1875/99.3125/99.4375 put fly bought in 4,000 at 1.25
• On Tuesday, demand jumped for similar option plays across Jun22 eurodollar options following Powell’s comments that the Fed could speed up the pace of tapering
  • The flows appeared as new risk in preliminary open interest data
    • Eurodollar Flows Skewed to June 2022 Downside: Open Interest
• Tuesday’s eurodollar futures volumes in Jun22 contract were just over 450k, most since Oct. 28 -- open interest rose almost 15k in the tenor
• First full 25bp rate hike is now priced into the June meeting next year; recent positions in the Jun22 options stand to benefit should more hike premium be priced into the June FOMC meeting
• Second rate hike -- or 50bp -- is currently priced into the November meeting, with 63bp priced by the end of next year
• Some information comes from rates traders familiar with the transactions who asked not to be identified because they are not authorized to speak publicly

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