Trader Mints Millions in Hours on Bond Options Bet Tied to Fed

(Bloomberg) -- A bond trader appears to have hit the jackpot on a one-day options bet that Treasury yields would climb Wednesday after the Federal Reserve’s decision, potentially raking in millions of dollars in profits.

The position was in the so-called Treasury ‘Weekly’ options, which are short-term expiries designed to cover key market-moving risk events. It likely wasn’t the only such bearish options bet placed on the day, but the size stands out.

The trader spent about $2.3 million in premium on the bearish hedge, bought at a price of 3 ticks a few minutes before 11:30 a.m. New York time Wednesday. Within roughly 10 minutes of the 2 p.m. release of the Fed’s policy statement, the wager traded as high as 9 ticks, data compiled by Bloomberg shows — triple the entry point.

If the entire position had been unwound at the peak, it would have resulted in a roughly $4.6 million profit, although the limited volumes seen at that level indicate that the trader likely didn’t unload the entire wager.

Big Buyer of Treasury Options Targets Bond Selloff by End of Day

The trade proved profitable because of traders’ hawkish take on the Fed’s policy statement, in which the central bank announced its decision to pause after a series of interest-rate cuts since September. Trading in many of these contracts is anonymous, making it difficult to identify the firms involved and the exact details of the trade.

The Fed’s statement included language tweaks that appeared to upgrade officials’ labor-market assessment, and it also changed their language around inflation. At the time the trade was executed, US 10-year yields were trading at around 4.54%. The yield peaked at almost 4.59% on the day, and have since settled back to around 4.53% after Fed Chair Jerome Powell’s press conference ended.

In the statement, officials repeated that inflation remains “somewhat elevated” but removed a reference to it having made progress toward their 2% goal. In his press conference, Powell said that change wasn’t intended as a policy signal.