Historic bets were revealed on the eve of the Federal Reserve's decision! Federal funds futures holdings have broken one million, and the probability of interest rate hikes is still in the “one-third fog”

The Zhitong Finance App learned that as the shadow of the Federal Reserve's possible unexpected interest rate hike looms over the market, traders are pouring into the federal funds futures market at an unprecedented speed, and related contract holdings have soared to the highest level in history.

According to data from the Chicago Mercantile Exchange (CME Group), federal funds futures open positions (Open Interest) contracts (Open Interest) to be settled after this interest meeting reached 909,714 last Friday, breaking the previous record set by the October 2024 contract in one fell swoop — at the time when uncertainty about the results of the Federal Reserve meeting last peaked. On Monday, that figure climbed further to 967,136.

This surge in holdings reflects the unusually large differences in the market over the Fed's next move. According to past practice, the market usually forms an overwhelming consensus near the time of decision making, but as of Tuesday evening, traders still believe that the probability that the Federal Reserve will announce a 25 basis point rate hike at 2 p.m. Washington time on Wednesday is about one-third, while the more likely is that it will stand still.

There are many reasons for this division: signals in the economic sector are mixed, and the Federal Reserve's leadership is undergoing major changes — new Chairman Kevin Warsh (Kevin Warsh) is inclined to abandon his predecessor's approach of providing forward-looking policy guidance, leaving the market without its usual “anchor.”

Walsh has emphasized many times that the Federal Reserve must contain inflation that has continued above the 2% target since the beginning of 2021. However, the easing of inflationary pressure last month (affected by the fall in energy prices during the US-Iran cease-fire), combined with a slowdown in employment growth, may provide a reason for policymakers to suspend action until the next meeting in September.

Alex Manzara (Alex Manzara), a derivatives broker at RJ O'Brien & Associates, said: “This contract is actually a bet on whether to raise interest rates tomorrow or stay on hold. In the past, the Federal Reserve never disappointed the market; the pricing of federal funds futures contracts usually deviated from expectations by only two or three basis points before the meeting. Now, contracts are suddenly full of uncertainties — this has spawned the need for safe haven.”

A quick overview of the latest position signals in the interest rate market

SOFR Options Positions Dynamics

Last week, with respect to guaranteed overnight financing rate (SOFR) options due in September, December 2026, and March 2027, the most new risk was concentrated at 96.1875 exercise price, mainly in September and December; while 96.4375 bullish options (due in December) experienced the largest reduction in holdings. Among them, the December contract involved a “bullish vulture spread” of about 25,000 lots (buy 96.1875/96.3125/96.4375/96.5625), which opened a position on July 22, betting on upward risk. On the same day, another 20,000 lots were bought with a bullish spread of 96.00/96.1875.

Currently, the 96.375 exercise price has replaced 96.50 as the most intensive level of positions. Positions are concentrated on bullish options in September and December. Among the four most concentrated exercise prices, the volume of open positions for call options in September and December was about 1.9 times that of put options.

Treasury bond futures hedge costs

Recently, premiums to hedge against the risk of falling treasury bond futures have remained stable. Traders are still willing to pay more protection costs for long-term bond sell-offs, while premiums on 2-year and 5-year treasury bonds are close to neutral levels.

J.P. Morgan Treasury Bond Customer Survey

For the week ending July 27, the share of bulls remained the same as the previous week. The share of bears rose slightly, neutral positions declined accordingly, and the net position was close to the four-week average.