Bond Traders Rush to Cover Options Exposure as Fed Actions Become Unpredictable

As the Federal Reserve’s actions become increasingly unpredictable, bond traders are rushing to cover their options exposure.

Traders are selling interest-rate options in droves, which is causing a dip in rate volatility following a sharp increase in the wake of Silicon Valley Bank’s failure. Options linked to the Secured Overnight Financing Rate have been the most affected.

Traders are now cashing in on bullish bets that have paid off as bond yields decline. The trend is also having an impact on the cash market, with 76% of JPMorgan’s surveyed clients being neutral on Treasuries.

Open positions in SOFR options continue to cluster around the 95.00 strikes.