An unprecedented surge in trading volume was witnessed this week in a specific segment of the federal funds futures market, following the Federal Reserve’s meeting where officials maintained current rates but hinted at a probable rate increase by year-end. The spike in trading is based on the belief that the rate hikes are more likely to be implemented in December rather than November.
The federal funds futures market allows traders to speculate on the exact timing of policy actions by the U.S. central bank. The heightened trading activity focused primarily on the price difference between contracts for November 2023 and January 2024, a spread expected to widen if the Federal Reserve decides to bypass a November rate hike and instead raises rates in December.
Statistics released on Friday showed an increase in contracts where traders hold positions, suggesting these transactions generated new risk rather than settling existing positions. On Thursday, over 80,000 spreads between November and January were traded, setting a new record for this structure. Most of these trades were made at a level of 6 basis points, but this gap could extend beyond 20 basis points if consensus leans towards a December rate hike.
The largest transaction on Thursday involved 17,133 spreads, equivalent to approximately $715,000 per basis point. If the gap reaches 20 basis points, this trade would be worth an estimated $10 million per basis point.
In related news concerning short-term interest-rate products, swap rates associated with Federal Reserve meeting dates are currently factoring in slightly more than half of a quarter-point Federal Reserve rate increase in December.
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