According to Odaily, traders in the US interest rate options market are embracing a new emerging bet based on the Federal Reserve's interest rate trend. They estimate a reduction of up to 300 basis points (measured at the typical 25BP range, a 12-fold decrease) over the following nine months. Over the last three trading days, positions in the options market tied to the secured overnight financing rate have indicated that these wagers will benefit if the Federal Reserve reduces the interest rate to 2.25% in the first quarter of 2025.
However, such an outcome is unlikely unless the US economy unexpectedly enters a recession.
This is an ambitious bet, given that the market anticipates the Federal Reserve to lower interest rates by approximately 75 basis points throughout this time frame. Federal Reserve officials previously forecast that interest rates would be slashed by 25 basis points this year and 125 basis points by the end of 2025. Some people are now beginning to increase their bets to hedge against the repercussions of tail risks, such as sudden and dramatic rate cuts.