Hiking Enthusiasts
193K SR3Z4-Z5 calendars traded on Tuesday, and open interest in Z5 increased over 100K. That calendar spread is approximately the amount of eases (or hikes) priced in for 2025. Currently that spread settled at -62 bps (or 2.5 25bp eases). It’s safe to assume that someone really doesn’t think the Fed is going to ease much next year, and may even hike!
We may be in a minor regime change, where we went from an almost certain easing regime to possibly switching to more hikes. The market odds that the Fed Funds rate ends up higher by year-end is about 20%. Curiously, the odds that the FF rate is higher by the end of 2025 is 22%. These probabilities are based on the options markets (which could be slightly overstating the odds, as implied vol is usually slightly higher than the actual probabilities). While the markets are not pricing a hike as a central case, 20% commands some consideration.
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