US swaption investors pay steep price for hard-landing bets

Gertrude Chavez-Dreyfuss

Thu, Mar 13, 2025, 6:48 AM 4 min read

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - Investors successful U.S. involvement complaint options are paying a premium for trades that volition wage disconnected if determination is simply a melodramatic driblet successful involvement rates, suggesting the derivatives marketplace is pricing successful a sharper slowdown than anticipated successful the world's largest economy.

This concern was a large turnaround from earlier the January 20 inauguration of U.S. President Donald Trump erstwhile traders successful alleged "swaptions" were positioned for much tightening from the Federal Reserve owed to the incoming administration's planned tariffs and expectations that it would summation fiscal spending.

Transactional measurement of swaptions, which are options connected involvement complaint swaps, was astir $700 cardinal successful the week arsenic of precocious February, Commodity Futures Trading Commission information showed. The underlying asset, the complaint swap, measures the outgo of exchanging fixed-rate currency flows for floating-rate ones, and vice versa. Swaps are utilized by investors to hedge involvement complaint risk, including vulnerability to Treasury securities.

Market players said determination has been accrued request for "receiver swaptions," wherever investors person the fixed limb of a swap portion paying the floating rate. The payoff would travel erstwhile rates autumn arsenic the Fed tries to stimulate a decelerating system by easing monetary policy.

Receivers, arsenic they are referred to, typically bespeak a dire economical outlook, and are the other of "payer swaptions," a script successful which investors bargain the close to wage a fixed complaint and person a floating one. Demand for payer swaptions rises erstwhile the system is beardown and the Fed is raising rates to dilatory it down.

Guneet Dhingra, caput of U.S. rates strategy astatine BNP Paribas successful New York, said the options marketplace is assigning a higher probability of a drastic autumn successful involvement rates, though it doesn't mean it's going to happen.

"Those tail-risk probabilities person been elevated ever since Silicon Valley Bank went down successful 2023. That hazard has go much heightened successful the past mates of weeks," Dhingra noted, referring to uncommon market-shaking events.

Trump's policies connected tariffs on with sweeping national authorities occupation cuts nether Elon Musk's Department of Government Efficiency (DOGE) person raised the imaginable of a hard U.S. landing. Market participants feared that tariffs could rise prices for businesses and consumers, assistance inflation, and undermine wide confidence, thwarting economical growth.

Trump implicit the play declined to regularisation retired that his commercialized policies would pb to a recession, but clarified connected Tuesday that helium does not spot 1 happening.