With a rate cut (or two, or three) by the Fed in the coming 6 months now almost universally accepted by the market (with the exception of Goldman Sachs) if perhaps not the Fed quite yet, rates traders are already speculating on what happens next.
And as Bloomberg's Edward Bolingbroke notes, Eurodollar futures traders, having already decided that a cut is coming, are already looking beyond the expected easing cycle in "search of their next edge" - when will the Fed resume hiking.
This can be seen in the back end of the eurodollar strip, which is starting to re-steepen, pricing in a chance of rate hikes as soon as late 2020, just around the time of the next presidential election, and potentially around the time full-blown Chinese tariffs translate into higher consumer inflation. Of note, in the chart below: the spread between the September 2020 and September 2021 eurodollar futures contracts, has returned back to positive territory after being inverted for most of the past year.
This is not the first time projected rate hike(s) have emerged: last week saw a similar forward-looking play in the eurodollar futures market.
A big bet on steepening of the curve from September 2019 to September 2020 built up over two sessions has gained more than $20 million in value. A sale of the structure Tuesday may have been profit-taking on the position.
Meanwhile, looking closer into the future, the ED curve had priced in as much as three hikes by the end of 2019, a dovish bias that has eased modestly in recent days. Sellside researchers are on the same page: while both Barclays and JPM recently slashed their forecasts, and expect half-point cut in July followed by a quarter-point cut in September, they are late to the party party: as Bloomberg notes, traders were "scooping up cheap upside options to hedge against such a dovish scenario back in May."
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