Fed Leaves Rates Unchanged; $5 Trillion Short Bet Rapidly Unwinds

Huo Xing Finance reported that on July 31 the Federal Reserve kept its policy rate unchanged at 3.5%3.75% at its July meeting, triggering a swift unwind of large hedges built up on expectations of a rate hike. Data show open interest in August federal funds futures briefly jumped above 1 million contracts for the first time on record, equivalent to roughly $5 trillion in notional exposure. After the decision, CME data showed open interest falling by about 140,000 contracts. Leveraged funds that had built net short positions reversed course. August federal funds futures prices surged, turning speculative short trades that had bet on a hike into losses. Prior to the meeting, the market had pushed the implied probability of a July hike to nearly 50%, but the trades cooled quickly after newly appointed Fed Chair Kevin Warsh signaled no intention to raise rates.