Futures Discount Fed Hikes as Markets Rebound: Chart of the Day

By Liz Capo McCormick

The rebound in the outlook for improving economic growth and higher Federal Reserve policy rates seen in share prices isn’t as prevalent in money markets.
The top panel of the CHART OF THE DAY shows Eurodollar futures, which traders use to speculate on the path of the Fed policy rate, suggest rates in three years almost 0.75 percentage point below where they predicted in mid-September. At the same time, market indexes such as the Standard & Poor’s 500, as picture in the lower panel, have rebounded.
Global share price slide last week and debt yields tumbled as disappointing economic data from the U.S. to China damped growth prospects and pushed back how long the
market projects it will take until the Fed likely increases its zero to 0.25 percent policy target range.
Few new positions have been set after last week there was a large-scale exiting of prior bets, known as shorts, for a fall in prices of Eurodollar futures, said Boris Rjavinski, a New York-based interest-rate derivatives strategist at UBS AG.
“The Fed hasn’t really given the market much reason to readjust,” Rjavinski said. “The economic data has been OK, but not spectacular.”
Leveraged investors, which typically use borrowed money to boost returns, held record net accumulated wagers for declines in prices of CME Group Inc.’s eurodollar futures as of Sept.9, with 1,504,613 net shorts, according to Commodity Futures Trading Commission data. As of the most recent data through Oct. 14, the day before yields tumbled, net shorts were 522,759. A wager for lower Eurodollar futures prices is a view for higher implied yields, which move in opposite direction to price.