Traders are betting that the new chair of the Federal Reserve and the delayed release of economic data this month will support Donald Trump’s call for lower interest rates.
In the US futures market, the demand for short-term yield curve structures linked to the Secured Overnight Financing Rate (SOFR) is on the rise. SOFR is closely related to the expected outcome of the Federal Reserve’s interest rate decisions. This bet reflects market expectations that the pace of monetary policy easing may accelerate after Federal Reserve Chair Jerome Powell’s term ends in May. The announcement on June 17 will be the first under the new central bank governor.
A new vacancy emerged after Kevin Hassett, director of the White House National Economic Council, became the leading candidate to succeed Powell. Trump called Hassett a “potential Fed chair” at a cabinet meeting on Tuesday and said the race was “down to one person”. He also said he would announce the final choice early next year.
Christina Hooper, chief market strategist at Man Group, wrote in a note this week that the statement “will give rise to a ‘shadow Fed chair’.” “This could make it difficult for the Fed to effectively communicate monetary policy information and cause some confusion at a time when the market urgently needs clear guidance.”
Traders in the leveraged futures market have begun to simulate various scenarios. A huge SOFR futures transaction occurred on Monday – the largest transaction of this contract structure in over a year. Recently, trading in 3-month, 6-month and 12-month SOFR spreads has also been exceptionally active, with traders all keeping an eye on expectations of further interest rate cuts.
It’s not just the Fed chair’s remarks that are driving the futures spread trade. Goldman Sachs strategists are seeking to hedge ahead of the release of the November labor market data on December 16 (just before the January policy meeting). These data, which were delayed due to the US government shutdown, could fuel more dovish bets if they confirm recent signs of weakness in the labor market.
“Given the trend of a weak labor market, we continue to see an increasing asymmetry of front-end spending cuts,” strategists including George Cole said in a report on November 28.
They tend to buy short-term futures through the SOFR December 2026/December 2027 spread and purchase forward futures through conditional 2-year and 10-year bull futures strategies, thereby benefiting from the steepening of the yield curve. If Hassett is confirmed as the next chair of the Federal Reserve, these bets will further heat up.
Market bets on a dovish policy shift and an increased possibility of a rate cut in December pushed the 10-year US Treasury yield close to the 4% mark last week. US Treasury prices rose slightly later on Tuesday after falling in the early trading session, with the 10-year yield briefly topping 4.11%, hitting a new high in nearly two weeks.
JPMorgan’s Treasury Department client position survey shows that as of the week ending December 1st, investor long positions dropped by 9 percentage points and short positions rose by 3 percentage points. As a result, net long positions fell to the lowest level since November 3rd.
Over the past week, the option premiums used to hedge against treasury bond risks have continued to fluctuate around neutral levels. The premiums for near-month and mid-term futures contracts still slightly favor call options over put options, indicating that traders are more willing to pay higher prices to hedge against upward movements in near-month and mid-month contracts rather than downward ones.
