All eyes on Wall Street will be focused on the Federal Reserve‘s next Jackson Hole symposium, which starts on Thursday. Fed Chair Jerome Powell is set to provide what many see as the most important update of the summer on the central bank’s current plans for monetary policy.
As a result, many hedge funds have placed a sizable bet on the outcome of the Jackson Hole meeting — a bet so massive that it could cause significant problems for some hedge funds if they are wrong.
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Hedge Funds Place Record Bet On Jackson Hole
Bloomberg reports that a group of hedge funds have entered a huge short positions via futures on a key overnight interest rate that moves in step with the federal funds rate. The short amounts to a record bet that the Fed will remain hawkish at the Jackson Hole meeting as it continues working to rein in inflation, which is running at its fastest pace in 40 years.
The short position has more than tripled over the last month. It will rise even more if Powell shuns a dovish pivot during his Jackson Hole commentary on Friday.
Central banks have been implementing the steepest interest rate hikes in a generation, roiling the bond and rates markets in the process. Treasuries tumbled 9% in the first half of the year, a new record loss. However, in July, the asset class generated its largest gain in over two years as investor sentiment shifted to a more hopeful view amid signs that inflation could be close to peaking.
Volatility In Treasury Yields
Sean Keane of Triple T Consulting told Bloomberg that he expects "more of this sawtooth price action" that's been occurring over the last three to four months. He predicted that the market will continually try to "pick the peak in the rate cycle" before backing up again when investors worry that the world's central banks will do more in their fight against inflation.
During intraday trading on Monday, the yields on two- and three-year Treasuries, which are particularly sensitive to monetary policy, popped more than 10 basis points. However, they pulled back leading up to the trading session's close. Meanwhile, the 10-year Treasury yield rose above 3% for the first time in a month. However, the benchmark yield remained steady at around 3.1%.
According to Bloomberg, traders have built up large put structures over the last two trading sessions. They're betting on 10-year yields rising as high as 3.7% within the next month. The buying on this position continued on Monday, although it shifted from options dated in October to those with maturity dates in November.
Meanwhile, according to the latest data from the Commodity Futures Trading Commission, the net-short positioning for futures on the successor to the London interbank offered rate (LIBOR), which is the secured overnight financing rate, climbed to an "unprecedented" 695,493 contracts. According to Bloomberg, that amounts to about $17 million of cash risk per-basis-point move.
Will Powell Satisfy Wall Street's Desire For Clarity?
The massive hedge fund bet is predicated on Powell being clear about the Fed's policy plans during his commentary on Friday. However, Barron's suggests that the Fed chair will disappoint investors through a lack of clarity. Investors want to hear clear statements about the central bank's views on the need for further interest rate hikes, the implications of reducing its balance sheet, and its expectations for inflation and growth.
Barron's noted that the Fed has titled this year's symposium as "Reassessing Constraints on the Economy and Policy." The site defined a "reassessment" as "a search for a new starting point," adding that the title is an "inauspicious choice for those seeking clarity."
As with all things Fed, Wall Street's interpretation of Powell's commentary is likely to have a dramatic impact on the market's movements on Friday and next week.
