Traders ride the Trump volatility wave in Fed cut bets

A storm is brewing in the rates market, and traders aren’t taking chances. US President Donald Trump’s aggressive trade stance is rattling markets and clouding the economic outlook. However, Wall Street is scrambling to hedge against extreme shifts in Federal Reserve policy.

Hedge funds globally clawed out strong returns in May as they capitalized on a softening dollar. This includes volatile cross-asset dislocations, which were triggered by April’s global trade shocks.

However, while equities offered relief, commodities and fixed income proved risky. Meanwhile, bond markets went into selloff mode as concerns resurfaced over soaring debt in major economies like the US and Japan.

Markets split over Fed rate moves

As per reports, the swaps market still prices in two 25-basis-point cuts by year-end while options traders are bracing for everything from no cuts at all to a series of half-point slashes. This divergence reflects how Trump’s aggressive tariffs policies on steel and aluminum could disrupt jobs and stoke inflation.

Even the banks are in a split. Goldman Sachs sees rate cuts delayed until 2026. On the other hand, Citi says rate cuts are coming this year and recommends hedging for downside risks.

Big bets are building in SOFR Options and Treasuries. The open interest in “no-cut” bets has climbed to 250,000 contracts, worth $25 million in premium. The ultra-dovish hedges are also back, and traders are buying into positions that target multiple half-point cuts before year-end. It is mostly in the SFRZ5 put tree and spreads around the 95.875 strike.

The report mentioned that the SOFR options are buzzing at 95.625, and are the most crowded strike across June, September, and December tenors. This comes in when traders build layered bets on both upside protection and deeper cuts.

Hedge funds score 3% gains

A JPMorgan Treasury client survey showed that long positions rose to a two-week high, while short bets were trimmed. This suggested that a tilt toward duration amid growing macro risk. Commodity Futures Trading Commission (CFTC) data shows that a huge positioning shakeup might be in place.

It added that Hedge funds and asset managers dumped a massive 1.2 million 10-year note futures equivalents in the week to May 27. Asset managers slashed net long duration across the curve, dumping the equivalent of 718,000 10Y notes. Hedge funds unwound nearly half a million 10Y shorts. That’s cumulatively $22 million per basis point of long-end exposure gone.

Another report mentioned that hedge funds globally clocked a solid 3% gain in May. It pushed year-to-date returns to 5%, per a JPMorgan prime brokerage note. Stock-picking funds returned 3%, while multi-strategy platforms notched 2.5%.

The global digital assets market witnessed massive fluctuation throughout the past month, too. Bitcoin price surged by around 12% in the past 30 days, while it dropped by 3% over the last 7 days. BTC went on to hit its new all-time high (ATH) of above $111,900 on May 22. The biggest crypto is trading at an average price of $105,439 at press time.

Ethereum, the biggest altcoin, surged by more than 44% in the past 30 days, outperforming Bitcoin. ETH is trading at $2,633 with a volume of $15.45 billion. The cumulative crypto market cap, which went on to hit the $3.6 trillion mark, has now calmed at around $3.33 trillion. 

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