Where will the Fed go next? Traders join in on the "bold bet" on a rate cut in November.

Debate around the expected rate cut by the Federal Reserve in November is intensifying as officials begin to consider the next steps for the Fed, leading traders to increase their bets on futures related to the Fed's policy path. After the weaker-than-expected US consumer confidence data released on Tuesday, investors are more inclined to once again directly cut rates by 50 basis points during the decision on November 7th. As a result, for the swap market, between another significant cut and a more standard 25 basis points, it has essentially become a coin-flip game. Derivatives traders currently expect that the total rate cuts for the remaining two times this year by the Fed will be about 75 basis points, with the second rate cut set to take place on December 18th, meaning one of the meetings will see a 50 basis point cut. Nathan Thooft, Senior Portfolio Manager at Manulife Investment Management, said: We are getting closer and closer to the 50 basis points. Officially, we have not changed our stance. This year's view is two cuts of 25 basis points each, so one in November and one in December. Position data shows that since the Fed's decision last week, the rate market has begun to prepare for November 7th. Open interest contracts for two-year Treasury futures have increased significantly. The number of contracts held by traders maturing in December 2024 has risen to about 4.4 million, the highest so far, and this contract is closely related to the Fed's expected trajectory. Futures bets related to the Secured Overnight Financing Rate (SOFR) for December have also noticeably increased. However, due to conflicting signals from several policymakers regarding the November meeting, traders are currently not heavily betting in one direction, a situation different from the eve of the 50 basis point cut by the Fed on September 18th. On Tuesday, Fed Governor Michelle Bowman said the Fed should cut rates at a "moderate" pace, while two other officials downplayed the possibility of a 50 basis point cut the day before. Meanwhile, Chicago Fed President Austan Goolsbee said that rates need to be cut "significantly." Meanwhile, in the cash U.S. Treasury market, the bullish momentum before last week's Fed meeting remains unchanged, with J.P. Morgan's U.S. Treasury clients holding steady net long positions by September 23rd. During this period, due to the steepening yield curve in the bond market following the Fed's rate cut, the yield on the benchmark 10-year Treasury rose by about 12 basis points to around 3.73%. Here is an overview of the latest positioning indicators in the rate market: J.P. Morgan survey In the past week, both direct long and short positions of J.P. Morgan government bond clients increased by 2 percentage points, with the net long position remaining unchanged at 6 percentage points. The number of clients directly shorting is currently at the highest level in a month. Asset managers, hedge funds bullish on SOFR futures For asset managers and hedge funds, positions in SOFR futures remain net long, indicating they are preparing for further rate cuts. Data from the Commodity Futures Trading Commission (CFTC) shows that in the week ending September 17th, the day before the Fed rate cut, asset managers increased their net long positions by about $2 million per basis point of risk, while hedge funds closed out their net long positions in SOFR futures by about $2.6 million per basis point. In government bond futures, asset managers increased their long positions by about 135,000 contracts in 10-year government bond futures within the reporting week, while hedge funds increased their short positions by nearly 300,000 contracts in 10-year government bond futures. Most active SOFR options Over the past week, SOFR options with a strike price of 98.75 have been among the most active options. This is due to a significant number of bearish positions established on March 25th by the SFRH5 97.75/98.75 2x3 call spread, with about 80,000 long positions formed. Additional positions were added to the put options on December 24th following recent flow of funds buying the SFRZ4 96.00/95.75 1x2 put spread. SOFR options heatmap In the SOFR options market, contracts expiring in June 2025 with a strike of 95.50 remain one of the most actively traded levels, with heavy open interest in both call and put options expiring on December 24th at that level. Recent trades directly buying the put options expiring on December 24th at 95.50 have led to an increase in open interest at that strike. Protection from downside risks in options activity has also increased over the past week, including buying the SFRZ4 95.625/95.50 put spread and the SFRZ4 95.5625/95.4375 put spread by 1. Option premiums remain close to neutral Over the past week, premiums paid by hedgers in the market have continued to hover around neutral, varying from short-term to mid-term, after skyrocketing to bullish premiums several weeks ago as traders expected the market to continue rebounding. At the long end of the yield curve, premiums have begun to rise for downside hedging, evident in the negative skew in long-term bond bullish/bearish spreads, as traders anticipate the yield curve to steepen further.