Trader Behind Huge Fed Funds Wager Bags $14 Million in First Day

(Bloomberg) — A trader is pocketing big profits for breaking with the pack and placing a sizable bet that the Federal Reserve won’t increase the size of its interest-rate hikes.

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On Friday, someone purchased October futures with a notional value of $150 billion that are tied to the Fed’s benchmark overnight rate. The futures price in expected moves at the July and September meetings.

The trade marked a bet that financial markets had shifted too far by pricing in increasing odds that the central bank would raise its key rate by as much as a full percentage point at one of the two meetings.

The wager quickly turned profitable as expectations were dialed back heading into Friday’s close of trading. By day’s end, it was 11.5 ticks higher, amounting to a profit of about $14.4 million from the level at which the wager was placed.

Mammoth Trade in Fed Funds Futures Bets Against Full-Point Hike

Speculation that the Fed would start increasing the size of its rate hikes had surged after Wednesday’s consumer price index report showed that inflation jumped to another four-decade high, signaling that price pressures haven’t abated even as the central bank tightens monetary policy aggressively. By Thursday, futures contracts were pricing in high odds that the Fed would increase the rate by a full percentage point at one of the next two meetings.

But policy makers pushed back on that speculation, driving investors to pare their bets. Futures are now roughly pricing in that the Fed will raise its rate by 75 basis points at each of the next two meetings.

Preliminary CME open interest data shows a rise of 35,340 contracts following Friday’s trading activity, indicating the 30,000 block trade was most likely a new position. As of 10 am in New York on Monday, the contract was little changed from Friday’s close.

Fed members have now entered a self-imposed blackout period for speaking, meaning any shifts in market sentiment will be driven by data released ahead of the July 27 meeting. That includes reports on consumer confidence and manufacturing.