The 800lb gorilla in the room wants to know whether the FOMC will raise rates tomorrow. As a trader, the correct prediction of any Fed actions is fairly irrelevant. What matters is the correct prediction of prices of the markets I'm trading. There's nothing worse that nailing the report and but getting the market action wrong. That's why today, we'll look at the notable activity being taken by the big bond traders ahead of tomorrow's FOMC meeting.
There has been a significant change of opinion between the large speculators and the institutional bond traders since the last FOMC meeting on July 27th. The December 30-year Treasury Bond futures have seen nearly a 200,000 contract swing between these two market participants since the meeting. With the speculators taking long positions off the table in anticipation of the FOMC raising rates. Their justification is corroborated by the Chicago Mercantile Exchange's Fed Watch tool, which is currently predicting an 85% probability of a .25-.50 basis point hike and a 15% probability of a .50-.75 basis point hike. It certainly appears that we're having a conversation regarding, "How much?" rather than, "if?"
Once again, I'll refer to the point that we aren't trading their decision. We are trading the market action around the decision. This brings us to the commercial traders' action. The commercial traders have been buyers in each of the last three weeks leading up to tomorrow's announcement. This includes a 10% jump in their position over the last week as the futures market has sold off. They are clearly stating that regardless of the announcement, the current pricing near 166 in the December futures, which equals an implied yield of less than 2% is a bargain.
The key to supporting this setup lies in the massive difference in the size of the total positions carried the two trading groups. The commercial traders' total position near 583k contracts dwarfs the speculators' position of 206k. This allows the commercial traders to withstand considerably more pressure while managing to apply significantly more long-term support. Given the market's expected degree of volatility, I wouldn't be the least surprised if the market attempted to spike lower before the commercial traders come in and scoop up more 30yr T-Bonds at the bargain prices at which they clearly believe we're trading. We expect to use their support to create a buying opportunity of our own and will watch the long side of the market accordingly.
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