US swaption investors pay steep price for hard-landing bets

Written by Gertrude Chavez-Widivos

NEW YORK (Reuters) – Investors are pushing interest rates in the United States as well as the deals that will be paid if there is a significant decrease in interest rates, indicating that the derivative market is pricing in a more severe slowdown than expected in the world’s largest economy.

This situation was a major shift by US President Donald Trump on January 20 when merchants were placed in the so -called “switch” to further stress from the federal reserve due to the planned definitions of the incoming administration and its expectations that will increase financial spending.

The statements of the Futures Trading Committee showed that the volume of transactions for switching, which are options for barter interest rates, amounted to about 700 billion dollars per week from late February. The basic assets, switching average, measures the cost of exchange of cash flows with a fixed rate of floating rates, and vice versa. Blinds are used by investors to hedge the risk of interest rates, including exposure to treasury leaves.

Players in the market said that there was an increasing demand for “replacing the recipient”, as investors receive the fixed leg for exchange while paying the floating rate. The reward will come when the rates decrease as the Federal Reserve tries to stimulate the mutual economy by reducing monetary policy.

The receptions, as indicated, reflect a terrible economic view, which is the opposite of “switching the motivation”, a scenario in which investors buy the right to pay a fixed price and receive one floating. The demand to switch the motivation increases when the economy is strong and the Federal Reserve raises rates to slow down.

The Options Market, the options market, said a higher possibility of a severe decrease in interest rates, although it does not mean that this will happen.

“These possibilities have increased at risk since the Silicon Valley Bank decreased in 2023. These risks have become more high in the past two weeks,” DHINGRA indicated, referring to rare events in the market.

Trump’s policies on customs tariffs along with the cheerful functional discounts of the federal government have sparked the management of government efficiency in Ellen Musk (DOGE) the possibility of difficult decline in the United States. Participants in the market fear that customs tariffs can raise the prices of companies and consumers, raise inflation, undermine comprehensive confidence, and thwart economic growth.

Trump refused during the weekend excluding that his commercial policies would lead to recession, but he made it clear on Tuesday that he did not see his occurrence.