September 22, 2015 / 6:49 PM / 2 years ago

Futures speculators guess right on U.S. Fed rate hold

The United States Federal Reserve Board building is shown in Washington October 28, 2014. REUTERS/Gary Cameron

NEW YORK (Reuters) - At least one group of speculative investors threw caution to the wind last week and bet big that the U.S. Federal Reserve would not end its near-zero interest rate policy.

Even as economists and market prognosticators were almost evenly divided over whether the Fed would raise borrowing costs for the first time in nearly a decade, the latest data from the Commodity Futures Trading Commission shows that hedge funds and other large speculators ratcheted up bullish positions in interest rate futures markets.

Those positions would have profited handsomely from the Fed’s decision to leave rates unchanged for now due to an uncertain outlook about the global economy.

On Sept. 15, speculators’ bullish or long positions in federal funds futures exceeded their bearish or short positions by 27,560 contracts.

A week earlier, speculators held more shorts than longs in fed funds futures by 65,313 contracts.

This was the first time since January 2013 that speculators were “net long” fed funds futures, which gauge market expectations on the overnight interbank lending rate the Fed targets.

The swing in speculative bets was the largest ever at 92,873 contracts in one week.

Speculators also piled bullish bets in Eurodollar futures two days before the Fed decided against raising interest rates which San Francisco Fed President John Williams told Fox News on Sunday was a “close call.”

Their net longs in Eurodollar grew by 359,436 contracts to 415,295, the highest level since the week of May 3.

The sizable jump in net longs in Eurodollar futures foreshadowed a dramatic drop in short-dated U.S. Treasury yields following the Fed’s decision to stand pat.

The yield on U.S. two-year Treasuries notes US2YT=RR fell almost 11 basis points to 0.702 percent, which was its steepest single-day drop since December 2010, according to Reuters data.

Reporting by Richard Leong; Editing by Chizu Nomiyama

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