Traders increase short positions in federal funds rate futures, taking risks by betting on a July rate hike

This previously unimaginable move could be disrupted by a series of economic data. The probability of an interest rate hike at next month's policy meeting remains relatively low, with interest rate swaps currently pricing in about 9 basis points of increases—equivalent to an approximately 36% chance of a 25 basis point hike. Nevertheless, this probability has risen significantly; before the new Federal Reserve Chairman, Kevin Walsh, shifted the focus to price stability, the probability was nearly zero. Since the policy meeting on June 17, open interest in August federal funds futures—which measures the scale of new trading positions held by investors—has risen rapidly. The swift accumulation of new positions is broadly skewed toward the sellers, indicating traders are shorting the contract; if the probability of a rate hike continues to rise, these positions will benefit. Even if options traders previously sought to hedge against the rate hikes already priced into the market, these bets have been increasing. These bets may face a test as early as Thursday, when labor market data will be released. Any signs of weakening employment growth could reduce the chance of a July rate hike, putting the newly established short positions at risk.