Looking to the Futures
Yields rally as trader’s position for potential rate hikes
As Jerome Powell hands the reigns off to our new Federal Reserve Chairman, Kevin Warsh, we are already seeing a change in tune based on recent comments. Warsh has expressed ambition to shrink the central bank’s balance sheet which currently sits at around $6.73 trillion. For perspective, the Federal Reserve’s balance sheet sat just above $4 trillion during the covid pandemic and pushed slightly above $9 trillion at its peak. The Fed has historically used their ability to introduce stimulus or liquidity through the use of their balance sheet as a “tool in their belt” to push yields towards their target rate.
Warsh believes that reducing the balance sheet will allow rates to be cut thus benefiting a broader range of people. He argues that this path is better than the traditional quantitative easing, which tends to move through financial assets first. Warsh went on to express the need to move “slowly and deliberately” as there are significant risks and headwinds when taking away liquidity as opposed to introducing it through their open-market operations.
As the Fed proceeds with their “quantitative tightening” strategy, you will see a corresponding decrease in liabilities mainly through bank reserves. This can reduce bank liquidity for M1 consumers and those that hold financial assets. The Fed is expected to reduce their balance sheet mainly through their treasury securities holdings and agency MBS (Mortgage-backed securities).
Traders have already positioned themselves for higher rates as a result. The next meeting scheduled on June 17th has a 99.3 percent chance of keeping the target range the same (350-375 basis points) but if you shift your timeframe out to the end of the year swap positioning shows a 41.8 percent chance of a 25 bp hike and a 16 percent chance of a 50 bp hike likely expressed as two separate hikes.
There are already Fed members that are on record against Warsh’s new direction. Fed governor Michael Barr delivered a speech last week and publicly expressed that shrinking the balance sheet is “the wrong objective.” He further stated that he does not want to “undermine bank resilience, impede money market functioning, and threaten financial stability.” Barr zoomed out stating that obtaining the pre-2008 levels of $800 billion on the Fed’s balance sheet were completely unrealistic.
According to the CFTC Commitment of Trader’s Report, the Micro 10-year yield futures (/10Y) have positive change in long positioning by leveraged funds. Although open interest is very small, sitting at 3020 contracts, we’ve seen 858 contracts opened week-over-week as rates have moved higher.
Contract Specifications
Economic Calendar
8:30 am ET - Initial Jobless Claims
8:30 am ET - Housing Starts
8:30 am ET - Building Permits
8:30 am ET - Philadelphia Fed Manufacturing Survey
12:20 pm ET - Richmond Fed President Tom Barkin Speech
New Products
New futures products are available to trade with a futures-approved account on all thinkorswim platforms:
- Ripple (/XRP)
- Micro Ripple (/MXP)
- 100 OZ Silver (/SIC)
- 1 OZ Gold (/1OZ)
- Solana (/SOL)
- Micro Solana (/MSL)
Visit the Schwab.com Futures Markets page to explore the wide variety of futures contracts available for trading through Charles Schwab Futures and Forex LLC.