The Federal Reserve quickly closed its positions on interest rate hikes after putting down the balance. In August, unliquidated federal funds futures contracts fell sharply

The Zhitong Finance App learned that after the Federal Reserve announced that interest rates would remain unchanged, a large number of previous transactions betting on interest rate hikes in July were quickly reversed, and large-scale short positions established around August federal funds rate futures began to be centrally closed.

According to market data, the much-publicized August federal funds futures contract surpassed 1 million shares for the first time before the Federal Reserve's interest rate meeting, involving a nominal value of about 5 trillion US dollars, reflecting the high level of disagreement among investors about interest rate prospects before the July policy meeting. This is also the second monetary policy meeting since the new Federal Reserve Chairman Walsh took office.

David Robin, managing director of TJM LLC and interest rate strategist, said that the market previously generally believed that the Federal Reserve needed to maintain policy credibility through interest rate hikes, so it has established a large number of positions betting on interest rate hikes. Walsh's many previous public statements have actually sent a signal of “no action in July,” including stressing that more economic data is still needed as a basis for decision-making, so the market's previous big bet on the July interest rate hike ultimately proved to be in the wrong direction.

Robin said that after the Federal Reserve announced that it would keep interest rates unchanged in the 3.5% to 3.75% range, it took less than 5 seconds to quickly complete the adjustment of federal funds futures prices in August, and large numbers of short positions betting on interest rate hikes suffered losses.

According to data released by the Chicago Mercantile Exchange on Thursday, the number of open federal funds futures contracts in August decreased by about 140,000 compared to the previous trading day, indicating that a large number of short positions have been closed or left the market with stop-loss losses.

Since the August contract expires before the next Federal Reserve interest rate meeting on September 16, shorting the contract is actually betting that the July meeting will raise interest rates. Just before the interest rate decision was announced, the interest rate swap market once predicted that the probability of interest rate hikes in July was about one-third, and the market's implied interest rate hike had reached a maximum of about 12.5 basis points, which is equivalent to the probability of a “five five opening”. However, after the Federal Reserve was put on hold, expectations of implied interest rate hikes quickly fell to about 7 basis points, driving the price of federal funds futures to rise sharply in August, and also quickly turning previously established short positions from profit to loss.

According to data from the US Commodity Futures Trading Commission (CFTC), since May, leveraged funds have continued to increase short federal funds futures positions, and the scale has risen to the highest level in about a year. Meanwhile, market makers continued to increase their long positions, taking on the other side of leveraged fund transactions.

The most watched deal in the market occurred on June 16, the day before Walsh first presided over a monetary policy meeting. On the same day, an August federal funds futures bulk sale order with a size of 50,000 was traded at 96.350. Each basis point fluctuation corresponded to a profit and loss of about US$2.1 million. If this position was held until this week's interest rate meeting, the profit surged about $10 million before the policy was announced, but as the Federal Reserve announced that interest rates would remain unchanged, it would turn into a loss of about 3 million US dollars by the close of Wednesday.

In addition, before Wednesday's interest rate meeting, there were also about 20,000 short August federal funds futures contracts in the market, with transaction prices between 96.295 and 96.290. If the relevant position is not closed in time, the amount of loss for the day is approximately US$6 million. Since futures market transactions use an anonymous mechanism, it is impossible for the outside world to confirm specific trading institutions and ultimate beneficiaries.

Although the federal funds futures trading volume remained at a high level of about 215,000 shares on Thursday and August, it was significantly lower than Wednesday's record of 728,000 shares. The concentrated liquidation of large numbers of positions on the same day drove a sharp rise in trading volume. In contrast, the average volume of the contract over the past 15 trading days was about 318,000.

Alan Taylor, founding partner of Archer LLP, said that when the market initially only included interest rate hike expectations of about 3 basis points, it was more cost-effective to establish relevant hedging positions; however, as the market gradually pushed interest rate hikes expectations to about 9 basis points, the risk of continuing to hold related positions increased markedly.

Taylor said that considering the large size of positions, establishing protective positions in advance when hedging costs are low is a reasonable choice. However, as expectations of interest rate hikes continue to heat up, some investors have already begun to reduce their positions, and the market never really believes that the probability of interest rate hikes in July will exceed 50%.