Traders Pile Into Tail-Risk Bets That Fed Won’t Hike at All
Traders this week have been busy snapping up Eurodollar call options on underlying March 2025 futures.
(Bloomberg) -- Treasury yields are rising amid optimism over the global recovery but there has been a run on Eurodollar options betting the Federal Reserve will opt not to raise interest rates at all.
Traders this week have been busy snapping up Eurodollar call options on underlying March 2025 futures that target three-month Libor to fix below 0.5%. These pay off if markets price the Fed keeping its benchmark at its lower bound until then. Futures markets are currently anticipating Libor will rise to about 1.47% by the first quarter of 2025.
This tail-risk hedge, a position aimed at protecting against extreme outcomes, has been bought repeatedly over the past week. Thursday’s session saw purchases of more than 110,000 of the options, according to traders in London and Chicago familiar with the transactions. The preliminary release of open interest data, which measures outstanding positions, has ballooned to more than 153,000 from about 22,000 a week ago.
A scenario where the Fed ends up holding rates near record lows through to 2025 would probably mean that the global economy fails to recover from the pandemic, resulting in central banks maintaining their ultra-easy policy.
Traders have already ponied up around $6.5 million on the Eurodollar hedge. While the underlying contract targets rates in March 2025, the option has a seven-month expiry, rolling off in March 2022, or what’s commonly known as a mid-curve option.
The past few days have also seen pockets of buying in options which target negative Libor, another indicator that traders are hedging against a significant delay in the global recovery.
©2021 Bloomberg L.P.