(Bloomberg) -- Treasury options traders are protecting against everything from multiple interest-rate cuts this year to a hike ahead of the US Federal Reserve meeting this week.

Recent inflation data has remained stronger than had been expected, dimming expectations that the central bank will cut rates any time soon. While short positions in Treasury futures extended last week as yields pushed through fresh yearly highs, options flow has suggested growing uncertainty around the path of the Fed’s monetary policy for this year, with a number of deep out-the-money tail-risk hedges appearing across a number of tenors. 

Read more: Inflation Data Reinforce Powell’s Shift Toward High for Longer

The positioning covers most extreme dovish and hawkish scenarios being priced into this year, including hedges targeting a policy rate as low as 3% by the December FOMC versus around 5% currently priced into the swaps market. 

On the flip side, option plays have also targeted rates higher-for-longer over the year and even positioning for one more hike has also been popular over the past week. On Friday, a trader bought March 2025 put spreads targeting the Fed to hold rates steady into 2025.

“It makes sense that the options market should reflect some probability that the next Fed move will be a hike given cuts have been pushed out, but the bar is high for that outcome,” Tanvir Sandhu, Bloomberg Intelligence’s Chief Global Derivatives Strategist, said in an email. “The markets (and the Fed) really needs the data to do the talking on disinflation being back on track.” 

Read more: Traders Add Bets That Fed to Skip Interest-Rate Cuts This Year

Tactical positioning in Treasuries has been aggressively short over the past couple of days, with open interest building in futures as yields have stretched to fresh yearly highs, with the 2-year breaching 5% and 10-year pushing above 4.7% before paring the jumps slightly. 

New money is coming into the higher-rate trade, with short positions building as futures sell off. This has been most apparent in the front- and belly of the curve where open interest in 2-year note futures has now risen in 21 of the past 22 trading sessions. US 2-year yields peaked at 5.025% Thursday, the cheapest levels since November as traders pared pricing of rate cuts for this year and beyond. 

Currency markets are watching both the Fed and the Bank of Japan. Appetite for options that pay out on a sizable move in the Japanese currency in either direction is near its the highest level since October 2022. Risk reversals show this is mostly down to hedging against a sharp rally.

The yen dropped as much as 1.8% on Friday to 158.44 per dollar, a fresh 34-year low, after US data showed inflation pressures remain, supporting recent messaging from Fed Chair Jerome Powell on keeping rates higher for longer.

The yen is down almost 11% since January and a steep acceleration of the move could lead Japanese authorities to step in as the currency nears its 1990 low of 160.20 versus the greenback. Masato Kanda, Japan’s top currency official, said in February that a 10-yen move over one month against the dollar is considered rapid.

One-week volatility in dollar-yen headed Friday for its strongest close in four months, even as the BOJ-meeting risk was priced out, showing that intervention risk is keeping demand for long-volatility exposure intact. And yen overnights ended the week at 11.5%, highest reading for a Monday expiry since January 2023.

“The options skew in G10 FX can reprice further in favour of USD if inflation proves to remain sticky and the timing of cuts gets pushed out even further,” said Sandhu.

BI LATEST RESEARCH: 

  • Macro, Central Bank Pricing Through Lens of Option Distributions
  • Zero-Day Options Popularity Drives Record Notional S&P Volume
  • Options Hedges Pricing Risk of Fed Hikes
  • Deriving Probability From Option Prices Across Asset Classes

TOP NEWS:

  • Jane Street’s $1 Billion Trade Puts Spotlight on Indian Options
  • Yen Watchers Ask Where Is Japan as Currency Losses Accelerate
  • Traders Add Bets That Fed to Skip Interest-Rate Cuts This Year

EQUITIES

  • Spot VIX moved back into a discount versus nearby futures, with the front part of the curve weakening as the S&P 500 had its best week this year, buoyed by strong earnings from Microsoft Corp. and Alphabet Inc.
  • VIX calls also took a hit, with 3-month 25-delta strikes under the most pressure as selloff fears abated.
  • Amazon.com Inc., Apple Inc., Novo Nordisk A/S and Shell Plc are among companies reporting earnings. Latest implied moves in the session following the earnings release:

CROSS-ASSET VOLATILITY:

KEY CHARTS:

  • S&P 500 1-month implied volatility slipped back to a discount to 3-month, after running at near parity for most of the month.
  • Nasdaq 100 implied volatility jumped relative to the broader index with technology shares swinging during a busy earnings week.
  • India Nifty 50 implied volatility drifted above European and US, returning to a level last seen at the beginning of the month.

EQUITIES OPTIONS WRAPS:

  • Alphabet Calls in Focus; Meta Call Bought: Options Snapshot
  • ONGC, Eicher Motors, Shree Cement: India Options Wrap
  • KT, SK Telecom, Hyundai Mobis: South Korea Options Wrap
  • New World Dev, CCB, Wuxi Biologics: Hong Kong Options Wrap

COMMODITIES

  • Brent and WTI skew flipped back to favoring puts and implied volatility fell back with no worsening of Middle East tensions.
  • US natural gas volatility sank as futures slumped toward a 29-year low and spot prices in West Texas fell to around negative $3 per MmBtu after a fire shut a pipeline system.
  • Silver and gold ETFs maintained call skews with all eyes on the Fed rate decision Wednesday.

Commodities positioning:

  • OIL BAROMETERS: Diesel Crack at 10-Month Low; Skews More Bearish
  • METAL BAROMETERS: Silver Seen Hitting $32 on Renewables Demand
  • CFTC Money Managers’ Commodity Positions for April 23 (Table)

 

RATES/FX

  • Euro-dollar volatility mostly moved sideways with traders focused on the BoJ Friday and the Fed this week.
  • Dollar-yen 1-week implied volatility jumped as traders eye potential Bank of Japan intervention in the yen.
  • SOFR options open interest built up around the 94 strike across a number of tenors.

FX/RATES positioning and wraps:

  • Yen Traders See Risk of Intervention at Highest Since Late 2022
  • Yen Option Turnover Surges as Bearish Bets Build: FX Options
  • Hedge Funds Extend Record Front-End Futures Short Position: CFTC
  • Treasuries Advance as Yields Retreat From Yearly Highs After PCE

ECO CALENDAR

  • April 29
    • Germany April CPI
    • Eurozone April economic confidence
  • April 30
    • China April manufacturing PMI
    • Eurozone 1Q GDP
    • Eurozone April CPI
    • Germany 1Q GDP
    • US 1Q employment cost index
    • US April consumer confidence
  • May 1
    • US FOMC rate decision
    • US April ISM manufacturing
  • May 2
    • South Korea April CPI
    • India April HSBC manufacturing PMI
    • US March factory orders
    • US weekly jobless claims
  • May 3
    • US April nonfarm payrolls
    • US April ISM services index

This story was produced with the assistance of Bloomberg Automation

 

 

--With assistance from Vassilis Karamanis and Robert Fullem.

©2024 Bloomberg L.P.