On Tuesday, when everyone was still anxiously waiting for the US March CPI report, a report from foreign media swept the financial world. The report said that an unknown trader made a single record-breaking transaction, betting that Wednesday's CPI data would be mild, thus forcing the Federal Reserve to cut interest rates earlier. However, the result was not as expected. So, after the CPI data was released on Wednesday, the trader once again made headlines, this time because his margin call was too shocking.
On Tuesday, a very eye-catching block trade occurred during the trading session of the U.S. short-term interest rate futures, the secured overnight financing rate (SOFR) futures expiring in December 2024, which was the largest transaction of its kind. The specific time was shortly after 9 am New York time on Tuesday, when 75,000 SOFR futures contracts expiring in December 2024 changed hands, and the Chicago Mercantile Exchange confirmed that this was the largest transaction in the product to date.
Bloomberg reported the trade extensively at the time because it single-handedly drove the Treasury market higher that day. After all, no one would have thought that they would bet tens of millions of dollars without knowing anything about it, and speculation was that the trade might have been initiated by a single buyer, just as the market expected mild CPI data for March, which could lead to renewed expectations of an early Fed rate cut. State Street Global Advisors also boldly predicted that the Fed would cut interest rates by a massive 50 basis points in June, and comments from Lael Brainard, an economic assistant to President Biden, also strengthened people's confidence in this prospect.
As of the time the trade was completed, swaps markets were pricing in about 65 basis points of rate cuts by the Federal Reserve by the end of the year. SOFR futures expiring in December 2024 were trading slightly above the price of the block trade, indicating continued market activity and interest in hedging or speculating on rate moves.
But in hindsight, the trader who swiped the screen knew nothing. The actual CPI data released on Wednesday was strong on all indicators, triggering a market crash, and the trade "blew up" in spectacular fashion. Bloomberg calculated that the position would have lost about $50 million based on the price action of December 2024 futures shortly after the CPI data was released.
Full pricing for the first 25 basis point rate cut of the year has shifted from September to November following the hot CPI report, with the market now pricing in fewer than two rate cuts for all of 2024. While it is not known who placed the record futures bet or if it was made in conjunction with other trades, the size of the trade (a $2 million gain or loss for each basis point change) suggests it was intended to offset a separate underlying position, likely a bearish one, though that is not clear.
Separate data from the Chicago Mercantile Exchange on Wednesday showed it was a new bet or hedge, rather than short covering of an existing position. The unnamed trader wasn’t the only victim of Wednesday’s hot inflation data. State Street got a slap in the face on Tuesday when it predicted the Federal Reserve would cut interest rates by 50 basis points as early as its June meeting. Swaps currently reflect only a 3 basis point rate cut at the June FOMC meeting, which translates to just a 12% chance of a 25 basis point cut that month. If State Street had money invested in its view, it’s now gone.
The article is forwarded from: Jinshi Data
