Traders in US futures markets are actively considering various policy scenarios as they assess the possibility of a Donald Trump-backed Federal Reserve chair and a series of delayed economic data releases that could significantly alter the economic landscape. Investors have been increasingly investing in short-term curve structures tied to the Secured Overnight Financing Rate (SOFR), which closely mirrors anticipated outcomes of Federal Reserve interest rate decisions.
These new positions, which favour increased interest rate cuts next year, began to accumulate after Kevin Hassett, Director of the White House National Economic Council, emerged as the leading candidate to replace Jerome Powell as head of the central bank. Futures activity intensified on Monday following Trump’s weekend announcement that he had made a decision on his nominee. He further stated on Tuesday that the new chair would be announced “early next year.”
The positioning in SOFR partly reflects the potential for an accelerated pace of monetary easing following the conclusion of Powell’s term in May, with the June 17 announcement potentially being the first under a new central bank leader. Jack McIntyre, portfolio manager at Brandywine Global Investment Management, suggests that cutting rates while inflation remains above the Fed’s target could push yields on long-end Treasuries higher, even as short-term rates decline.
McIntyre added, “If Hassett is confirmed, the most likely outcome is bear steepening.” He also noted, “I think of myself as part of the bond vigilantes. My job is to send a message to the administration… it’s still wait-and-see.” Traders in the leveraged futures market have already taken action, with a significant buyer emerging on Monday in one SOFR futures fly, marking the largest trade observed in that particular structure in over a year. Recent sessions have also witnessed heightened activity in three, six, and twelve-month SOFR spreads, as traders aim to capitalise on further rate cuts.
