Hedge Funds Pile Into a Record Hawkish Rate Bet Pre-Jackson Hole

Hedge funds are unleashing record bets that the Federal Reserve will stick to its hawkish script as they rapidly position for higher interest rates in a key corner of the derivatives market.

The group has collectively placed a big short across futures referencing the official successor to London interbank offered rate known as the Secured Overnight Financing Rate. This wager stands to benefit should Fed Chair Jerome Powell effectively rule out a dovish pivot at this week’s annual symposium in Jackson Hole.

The net-short positioning hit an unprecedented 695,493 contracts in the latest Commodity Futures Trading Commission data. That’s the equivalent of around $17 million of cash risk on the table per-basis-point move.

The pace at which hedge funds have built up this short position has more than tripled in size over the past month -- even as the broader futures market continues to price in interest-rate cuts by the end of the next year.

Meanwhile in eurodollar futures, short wagers from hedge funds are near this year’s highest levels at just over 2.6 million contracts, on a net basis.