According to the Zhìtōng Finance APP, the debate over the expected rate cut by the Federal Reserve in November is intensifying. As officials begin to consider the Fed's next steps, traders are increasing their bets on futures related to the Fed's policy path.

Following weaker-than-expected U.S. consumer confidence data released on Tuesday, investors are more inclined to expect a direct 50 basis point rate cut in the November 7th decision. This has essentially turned into a coin toss game for the swaps market, between another significant cut and the more standard 25 basis points.

Swaps traders currently expect the remaining two rate cuts by the Fed this year to total about 75 basis points, with the second cut scheduled for December 18th, indicating one of the meetings will involve a 50 basis point cut.

Nathan Thooft, Senior Portfolio Manager at Manulife Investment Management, stated: 'We are getting closer and closer to 50 basis points.' 'Officially, we haven't changed our stance, with the view this year being two 25 basis point cuts, one in November and one in December.'

Position data shows that since the Fed's decision last week, the interest rate market has begun preparing for November 7th. Open interest in two-year U.S. Treasury futures has significantly increased. The number of contracts held by traders expiring in December 2024 has risen to about 4.4 million, the highest to date, closely tied to market expectations on the Fed's path. Futures bets related to the Secured Overnight Financing Rate (SOFR) for December are also notably on the rise.

However, due to conflicting signals from multiple policymakers ahead of the November meeting, traders are not heavily betting in one direction at the moment, unlike the situation prior to the 50 basis point rate cut on the eve of the Fed's September 18th meeting.

On Tuesday, Federal Reserve Governor Michelle Bowman stated that the Fed should cut interest rates at a "moderate" pace. The day before, two other officials downplayed the possibility of a 50 basis point rate cut. Meanwhile, Chicago Fed President Austan Goolsbee said that rates need to be cut "significantly."

Meanwhile, in the US Treasury market, the bullish momentum before last week's Fed meeting remained unchanged. As of September 23, JPMorgan's US Treasury clients maintained stable net long positions. During this period, trading in the bond market saw a significant steepening of the yield curve following the Fed's rate cut, with the benchmark 10-year US Treasury yield rising by about 12 basis points to around 3.73%.

Here is an overview of the latest positioning indicators in the interest rate market:

JPMorgan Survey

In the past week, both the direct long and short positions of JPMorgan's bond clients increased by 2 percentage points, while the net long positions remained unchanged at 6 percentage points. The quantity of all clients directly shorting is currently at the highest level in a month.

Asset management, hedge funds bullish on SOFR futures

For asset management companies and hedge funds, positions in SOFR futures remain net long, indicating they are preparing for further rate cuts.

According to the data from the Commodity Futures Trading Commission (CFTC), in the week ending September 17, the day before the Fed's rate cut, asset management companies increased their net long positions by about $2 million per basis point, while hedge funds closed out about $2.6 million in long positions in SOFR futures per basis point.

In terms of treasury futures, during the reporting week, asset management companies increased their long positions in about 0.135 million 10-year treasury futures contracts, while hedge funds increased their short positions in almost 0.3 million 10-year treasury futures contracts.

The most active SOFR options.

In the past week, the SOFR option with a strike price of 98.75 was one of the most active options. This is due to a large number of moderately bearish interest rate positions established on March 25 through the SFRH5 97.75/98.75 2x3 call spread, with approximately 80,000 long positions already in place. Additional positions have been added to the bearish options on December 24 after recent fund flows involving the purchase of the SFRZ4 96.00/95.75 1x2 put spread.

SOFR options heatmap.

In the SOFR options market, for contracts expiring in June 2025, the strike price of 95.50 remains one of the most actively traded levels. There are significant open positions in both call and put options at this price level that expire on December 24. Recent trades include direct purchases of put options with a strike price of 95.50 expiring on December 24, leading to an increase in outstanding contracts at this strike price. Risk protection activities for options have also increased in the past week, including buying the SFRZ4 95.625/95.50 put spread and buying the SFRZ4 95.5625/95.4375 put spread by 1.

The options premium is still close to neutral.

In the past week, the premium paid for hedging in the market continues to hover around neutral, varying from short-term to medium-term, while a few weeks ago it surged to a call premium as traders expected the market to continue to rebound. At the long end of the yield curve, premiums are starting to rise, indicating hedging selling, which can be seen from the negative skew of long-term bond call/put spreads, as traders expect the yield curve to steepen further.