Options Traders Are Putting a March Fed Rate Hike Back in Play

(Bloomberg) -- Bets that the Federal Reserve will raise rates again in March, which virtually disappeared from U.S. interest-rate options markets last month, are making their way back.

While traders are still nowhere near pricing in a full rate increase, some of the more dovish bets have been unwound in recent days. Most notably, CME Group’s open interest data for Tuesday confirmed an exodus from March 2019 eurodollar calls struck at 97.375 -- a component of several structures set up to profit from a dovish shift by the Fed. Open interest in the strike shrank by 177,688 contracts, or nearly 28 percent. And open interest increased in December 2019 put strikes involved in a structure targeting a more hawkish Fed policy path.

Options Traders Are Putting a March Fed Rate Hike Back in Play

Overnight indexed swaps also show rate-hike premium creeping back into expectations for this year, after having been rapidly flushed out, even as a growing number of Fed officials appear to favor a pause. Pricing for the March 20 meeting, which at one point was for 4 basis points of cuts, has rebounded to an increase of 2 basis points. And there’s plenty of time for more should Fed officials decide to tip their hand.

Traders will be watching for signals in Wednesday’s 2 p.m. New York time release of the minutes for last month’s meeting, when officials projected two rate increases in 2019.

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