A prescient tip from interest-rate strategists at Goldman Sachs Group Inc. and Barclays Plc has paid off for investors as traders scrap wagers on a policy pivot by the Federal Reserve.
(Bloomberg) — A prescient tip from interest-rate strategists at Goldman Sachs Group Inc. and Barclays Plc has paid off for investors as traders scrap wagers on a policy pivot by the Federal Reserve.
Both banks had recommended trades based on the idea that the US bond market was overly optimistic that the Fed would cut its policy rate this year after a concerted hiking campaign to battle inflation. That playbook came good on Wednesday when the Fed held its benchmark rate steady, but indicated that further hikes — not cuts — were likely.
Barclays strategists Thursday advised taking profit on the trade — a short position in December futures on the Secured Overnight Financing Rate, a short-term interest rate influenced by the Fed’s policy rate. Customers who put it on when it was recommended March 23 netted about $30 million per 10,000 contracts as the price dropped 125 basis points.
As for Goldman Sachs, its May 5 recommendation to pay December swap rates — equivalent to a short position in December fed funds futures — is about 80 basis points in the money as of Friday, including a sudden 15-basis-point move on Wednesday shortly after the Fed’s decision at 2 p.m. in Washington. That’s worth about $33 million per 10,000 contracts.
While the Fed said it was pausing to assess the impact of raising its benchmark rate at every meeting since March 2022, Fed Chair Jerome Powell said additional hikes are likely because inflation remains elevated.
Also, policymakers released forecasts for the fed funds rate that were notably higher than their previous ones, from March. The new forecasts anticipate an additional half-point of rate hikes by the end of the year. Markets responded by pricing in a higher expected peak for the fed funds rate of about 5.30% and little chance of a reduction this year. The current range is 5%-5.25%.
Led by Anshul Pradhan, the Barclays strategists replaced their winning trade with one predicated on fading expectations for rate cuts next year. The short position in December 2024 SOFR futures would benefit from the market pricing in less than 150 basis points of easing next year. Traders currently see about that level of rate reductions.
That could change as soon as next week, when Powell is slated to field questions on future monetary policy from the House Financial Services panel Wednesday.
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