Traders Go All-In on 2022 Fed Hike as Futures Short-Bets Surge
(Bloomberg) -- Traders in a key corner of the U.S. short-term rates market are ramping up short positions in futures amid growing expectations that the Federal Reserve will hike faster and more aggressively starting at the end of next year.
In the wake of Wednesday’s stronger-than-forecast consumer-price report, preliminary CME Group Inc. data on eurodollar futures show that open interest -- the number of contracts in existence -- surged in a number of expiration dates through the end of 2022.
The biggest increase came in December 2022 futures, which traded in a record amount Wednesday -- consistent with a continued build-up of short positions. This contract represents a key area in front-end rates as it coincides with expectations for when the Fed will lift its benchmark from near zero, after concluding the tapering of its bond-buying program earlier in 2022. At one point Wednesday, traders were fully pricing in liftoff by September 2022. A second quarter-point hike is anticipated by March 2023.
The hedging of option wagers may also be a key reason for the elevated open interest in the December 2022 eurodollar futures. Hawkish Fed plays implemented over the past few months, targeting liftoff by the end of 2022, may also be subject to extensive hedging activity as rate-hike pricing solidifies earlier than previously expected.
“The post-CPI sell-off in the front might be due to an increasing likelihood that a tighter labor market is here to stay and stickier inflation might force the Fed to tighten earlier,” JPMorgan Chase & Co. strategists said in a note.
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