An anonymous bond trader made a massive bet in the short-term interest rates market Wednesday.
Some 118,000 contracts changed hands at 9:38 a.m. New York time in the futures market - it was the largest such wager on record. The block trade was linked to the Secured Overnight Financing Rate, where performance is closely attuned to the immediate path of the Federal Reserve's monetary policy.
If not an outright bet to fade the amount of central bank easing priced for this year, the wager appeared to be an investor taking profits and unwinding their long position as the contract traded close to its yearly highs. Block trades are privately negotiated single-price transactions often used by institutional investors who prioritize size over price sensitivity.
Swaps traders are speculating there will be about 0.75% of easing in 2024, that's ahead of policymakers' stated target of another half a percentage point of interest-rate cuts.
CME Group Inc. confirmed the block is the largest yet for the product. The amount beats a 75,000 trade seen back in April, a buyer in the same December 2024 SOFR futures contract.
Shortly after the block trade, the underlying December 2024 SOFR price dropped sharply, suggesting the trade was seller-initiated. Two-year yields "- which have been hovering around 2022 lows recently "- quickly reversed and pushed to the day's highs.
At the start of September, there was a heavy amount of buying seen around 20 ticks lower than Wednesday's price.
At a size of 118,000 futures contracts, the bet equates to a risk weighting of about $3 million per basis point move. A 20-tick move higher on a trade that size would equate to $60 million of profits. CME open interest data, released in the early Asia session should provide more clues on the motivation behind Wednesday's record wager.
