A Hawkish Fed Bet Is Creating Buzz in Key Part of Rates Market

In the corner of the U.S. rates market that’s most attuned to Federal Reserve policy, a bet has emerged that will deliver a handsome payoff if traders move up the timing for when they expect the next tightening cycle to begin.

The trade is via options on eurodollar futures, and it’s been building in size over the past week. The ramp-up coincides with polls suggesting a growing chance of a Democratic sweep of both the White House and Congress in the Nov. 3 elections. For many investors, that scenario would pave the way for a significant fiscal-spending package, potentially hastening the economy’s rebound from the pandemic and causing inflation to accelerate toward the Fed’s goal.