Traders increase their bets on the Federal Reserve, suspense over the size of the November rate cut intensifies

The debate over the expected rate cut by the Federal Reserve in November is intensifying, as officials begin to consider the Fed's next move, traders are increasing their bets on futures related to the Fed's policy path. After the release of weaker-than-expected U.S. consumer confidence data on Tuesday, investors are more inclined to bet that the Fed will cut rates for the second consecutive month by 50 basis points on November 7th. As a result, the options market is once again becoming a game of "flipping a coin" between betting on another significant 50 basis point cut and a more standard 25 basis point cut. Currently, the pricing by options traders indicates that the total rate cut for the remaining two Fed decisions this year (the second one will be made on December 18th) is about 75 basis points, meaning one of the meetings will see a 50 basis point cut. Nathan Thooft, Senior Portfolio Manager at Manulife Investment Management, said, "We are increasingly leaning towards the 50 basis point camp. Although our official stance has not changed, which is two 25 basis point rate cuts this year - one in November and one in December." Position data shows that since the Fed's decision to cut rates by 50 basis points last week, the interest rate market has begun to prepare for November 7th. Open interest in two-year U.S. Treasury futures has significantly increased. The number of open futures contracts held by traders for December 2024 has risen to about 4.4 million, the highest so far. Futures bets tied to the overnight financing rate have also increased significantly. Meanwhile, in the cash U.S. Treasury market, the bullish momentum from the week before the Fed meeting last week remains unchanged, with Morgan Stanley's bond clients maintaining stable net long positions as of September 23rd. During this period, the yield on the benchmark 10-year U.S. Treasury rose by about a dozen basis points to around 3.73%, as the bond market's steepening trade gained momentum after the Fed rate cut. However, due to mixed signals from policymakers regarding the November meeting, traders are currently hesitant to make large bets in one direction. This is different from the situation before the Fed's 50 basis point rate cut on September 18th, when futures bets were leaning towards a 50 basis point cut. On Tuesday this week, Fed Governor Bowman reiterated that the Fed should lower rates at a "moderate" pace, while two other officials downplayed the possibility of a 50 basis point cut the day before. Meanwhile, Chicago Fed President Evans stated that rates need to be "substantially" lowered. The U.S. short-term Treasury yield fell to its lowest level of the year on Tuesday, as a sharp drop in a consumer confidence index increased the likelihood of another 50 basis point rate cut by the Fed. Despite a two-year U.S. Treasury auction, yields continued to decline. The $69 billion sale was expected to yield 3.520%, the lowest level for a two-year Treasury auction since August 2022 Apart from the benchmark sale, the lowest two-year government bond yield this year reached 3.524% on September 16th. Rob Waldner, Head of Macro Research at Invesco, said, "The Fed is easing policy, and as short-term rates fall, you may see the yield curve steepen."