As uncertainty surrounding the direction of interest rates by the Federal Reserve (Fed) increases, market investors are strengthening investment strategies in preparation for various scenarios.
Bloomberg reported on the 4th (local time) that as concerns grow that potential policy changes by President Donald Trump could create volatility in the market, some traders are preparing for the possibility that interest rates could either significantly drop or remain unchanged.
This trend is clearly reflected in financial products that act as a kind of insurance, where revenue varies depending on interest rate forecasts. In the 'swap market,' where investors make transactions reflecting anticipated future interest rate changes, two interest rate cuts are expected starting in October of this year.
Meanwhile, transactions in the 'options market' are taking place with a much broader range of possibilities in mind. Some believe the Fed will not cut rates at all, while others are developing investment strategies based on the assumption that there will be multiple cuts of 0.5 percentage points (p) by the end of the year. This shows that the market is currently considering a very wide range of scenarios simultaneously.
Strong economic indicators, such as April's employment recovery, support the forecast that interest rates may be kept on hold for the time being. However, there are also concerns that if former President Trump's tariff policies shake the labor market and stimulate prices, the Fed might cut rates sooner than expected. These conflicting factors coexist, contributing to increased market uncertainty.
To respond to this uncertainty, traders are increasing 'hedge transactions' to prevent investment losses. For example, they are acquiring options that generate revenue under certain conditions, aiming to reduce loss or make a profit when interest rates rise or fall. In fact, recently, large-scale transactions made under the expectation of a 0.5 percentage point cut by the end of the year have drawn attention.
According to JPMorgan, the positions of major institutional clients appear to be moving in a direction that anticipates a more 'accommodative monetary policy.' While bets that the Fed will cut rates are increasing among traders, opposing positions are on the decline.
The U.S. employment report set to be released on the 6th could significantly influence these market movements. If signs of employment slowing are detected, it could strengthen the likelihood that the Fed will shift toward cutting rates.