Bond Trader Cashes In Millions on Fed Rate Bet
A bond trader made a lucrative options bet on Wednesday, correctly predicting that Treasury yields would rise following the Federal Reserve's decision.
The trader purchased Treasury "Weekly" options, short-term contracts designed for major market events. The trader spent $2.3 million on bearish hedge options, bought at 3 ticks before the Fed's statement at 11:30 AM EST.
Within 10 minutes of the Fed's 2 PM EST announcement, the options soared to 9 ticks, triple the entry point. Potential profits would have reached $4.6 million if the entire position had been sold at the peak.
The trade capitalized on traders' hawkish interpretation of the Fed's statement, which indicated a pause in interest rate cuts. The statement also suggested a more optimistic view of the labor market and a shift in inflation language.
At the time of the trade execution, US 10-year yields stood at 4.54%. Yields subsequently peaked at 4.59% but settled back to 4.53% after Fed Chairman Jerome Powell's press conference.
The anonymous nature of many options trades makes it challenging to identify the firms and exact trade details involved.