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Speculators Are at Odds With Asset Managers on Near-Term Fed Bets

Positioning data on eurodollar futures show a growing disparity between the two groups.

Speculators Are at Odds With Asset Managers on Near-Term Fed Bets
Cash and dice sit on a craps table at the Sands Casino Resort in Bethlehem, Pennsylvania, U.S. (Photographer: Bradley C. Bower/Bloomberg)

(Bloomberg) -- Speculators and asset managers have been staking out increasingly divergent stances on the path of Federal Reserve interest rates as prospective cuts come more closely into focus.

Positioning data on eurodollar futures -- which are highly sensitive to the immediate path of central-bank rates -- show a growing disparity between the two groups. Speculators have amped up their net long position on the contracts in recent weeks, Commodity Futures Trading Commission data show, suggesting they’re on board with steeper cuts. Asset managers, on the other hand, have not only stuck to their short positions, but increased them, indicating some skepticism about the increasing amount of easing that’s been priced in.

Speculators Are at Odds With Asset Managers on Near-Term Fed Bets

The split, which has been in place since April, has widened as market participants continue to struggle with recent communication by U.S. central bankers and how big a cut they might make at next week’s policy meeting. Short-end rates were whipsawed last week after comments by Fed official John Williams that appeared at first to confirm the prospect of a half-point July cut. Pricing then swiftly returned to favoring a quarter-point cut after a clarification of his comments by the New York Fed, and reports since then suggest that’s the option policy makers are leaning toward.

U.S. overnight index swaps are currently pricing around 30 basis points of easing for the July 30-31 Federal Open Market Committee meeting, while around 72 basis points of reductions are priced in by year-end.

The latest CFTC data for the week through July 16 showed speculators extending their net long on eurodollar futures to 1.51 million contracts, the most since 2008. At the same time, asset managers increased their net short to 1.67 million contracts, a level unseen since October 2018. The long-short split has been in place since April, when CFTC data showed speculators turned net positive for the first time since June 2016.

With the Fed’s next decision rapidly approaching, the range of pricing seen last week in near-term eurodollar futures suggested market confusion rather than clarity as policy makers headed into their pre-meeting blackout period. That could also be a taste of fireworks to come in the wake of the meeting, especially with such divergent positioning in place.

To contact the reporter on this story: Edward Bolingbroke in New York at ebolingbrok1@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Greg Chang

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