Rate Traders Pile Into Option Bets as Fed Hike Expectations Grow




  • In Business
  • 2021-10-25 14:17:25Z
  • By Bloomberg
 

(Bloomberg) -- Traders of short-term interest-rate derivatives appear to be piling back into bets about the timing of the Federal Reserve's first monetary policy tightening ahead of the central bank's meeting next week.

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At the end of the two-day session, the Fed is widely expected to announce plans to begin tapering its massive bond-buying program. Yet when it will begin raising interest rates remains the wildcard and that's a favored angle for speculative trading in money markets.

Trading volumes of Eurodollar futures and options topped 20-day average levels on Friday. The volume of puts was more than three times call volume, while flows remained skewed towards downside liquidation, CME preliminary open-interest data suggest.

As of last week, traders priced in almost a full quarter-point rate hike by July and two increases before the end of 2022.

"Fed lift-off is now fully priced in for Q3 22, with a second hike fully priced in for Q4 22," Win Thin and Ilan Solot, strategists at Brown Brothers Harriman & Co. said in a note. "U.S. economic data remain firm and so we believe the upward trajectory in rates" is "intact."

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