Leverage positions in the U.S. Treasury futures market have recently reached record highs, and bond traders are betting that the U.S. Treasury market will continue to rebound and may even enter a long-term bull market. The main driving force behind this wave of rebounding bets is market expectations that the Federal Reserve will cut interest rates for the first time in more than four years. (Yields are inversely related to bond prices, so a rate cut is expected to push up prices)
Market data shows that bond traders have almost fully priced in the possibility of a 25 basis point rate cut by the Federal Reserve in September, while expectations for further rate cuts in November and December are also growing.
Powell could soon reveal monetary policy by year-end
As the annual meeting of global central banks is about to open in Jackson Hole, Wyoming on Thursday (22nd) U.S. time, the market focus is on Friday’s speech by Federal Reserve Chairman Jerome Powell, who may reveal more about the Fed’s plans before the end of the year. The insights on the monetary policy route are crucial to the future direction of the market.
Open interest in U.S. Treasury futures climbed to about 23 million 10-year Treasury futures contracts last week, a record, according to an analysis of CME and Bloomberg data, said Steward Partners Global Advisory. Eric Bailey, executive director of Wealth Management, said:
If traders get a big signal that a rate cut is imminent, stocks could react positively.
However, if the expected positive news doesn't materialize, stocks could be at risk of a massive sell-off following a big rally.
The S&P options market has priced in high stock market volatility
Global stock markets experienced a "super rebound" last week, and this annual meeting is seen as a key test of whether this rebound can be sustained. The market is anticipating high volatility for the S&P 500 Index on Friday, with the options market already pricing in the index moving more than 1% on the day, whether up or down.
The scale of risk corresponding to these open interests is quite staggering. Each basis point fluctuation in yield is equivalent to about 1.5 billion US dollars in risk. It shows that the market is highly sensitive to the direction of the Fed's policy. Bond traders bear such a high risk at this critical moment. Risky bets show strong expectations for an upcoming interest rate cut.
However, Tom Heinlein, a national investment strategist at US Bank Wealth Management, pointed out that looking back at the history of the past Jackson Hole annual meeting, the possibility of Fed Chairman Powell making a very specific interest rate cut commitment on this occasion is low. This also means that the market may not be able to get a clear signal of interest rate cuts from this meeting.
