Burned Bets on Fed ‘Patience’ Leads to Surge in Rates Volatility
- Vol market is being squeezed as short covering drives gains
- Lack of liquidity exacerbates volatility moves, traders say
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Volatility in interest-rate options is spiking as traders scramble to cover short positions before this week’s Federal Reserve decision. The turnaround reflects the market switching to price in rate cuts from earlier expectations policy makers would stay on hold.
A combination of investors bailing out of short volatility positions and demand for hedges from dealers stuck on the wrong side of long-volatility bets has led to the squeeze, traders say. The moves have been exacerbated by a lack of liquidity caused by a number of market makers closing their books due to the swings in Fed pricing, according to the traders who asked not to be named as they are not authorized to speak publicly.