Why Fed Funds Futures Are More Popular Than Ever

Fed Chair Janet Yellen remarked March 3 that a Fed Funds rate increase is “likely appropriate” at the FOMC’s March meeting. This sent market expectations of a rate rise soaring to over 80 percent, from 30 percent earlier in the week, according to CME Group’s Fed Watch tool.

 

It is just the latest spike in what has been an unusually active year in Fed Funds futures trading. In fact, barely a day seems to go by without interest rates futures breaking another record for volume traded or open interest.  So what is different about 2017?

The Economics

The change of administration in November clearly caught the market off guard and led to immediate volatility. Expectations of infrastructure spending from the Trump administration, funded mostly by increased bond issuance, saw yields on U.S. Treasuries rise. That helped fuel volumes in CME Treasury futures.

But perhaps a more direct catalyst to overall interest rate futures volume came in the form of the FOMC rate increase in December 2016. The strength of the American economy has continued to divide opinion in the market since with participants fluctuating between two and three rate moves from the Fed in 2017. We’ll get more clarity on this March 15 after the FOMC meets.

Fed Funds in Vogue

While 30-Day Federal Funds Futures aren’t new (they launched in 1994), recent trends have encouraged newfound attention, as market participants eye further potential rate hikes in 2017.

As the Fed consideration of rate hikes has increased, so has interest in Fed Funds futures. Volumes have trended higher over the last four years from less than 20,000 per day in 2013 to over 300,000 per day in February, a good portion coming the day the FOMC minutes were released. February 22 accounted for a record 658,720 contracts traded, and open interest – the number of open trades – grew to a new record of 1.6 million.

 

 

It’s not just trading volume either.  In 2016 the CME Fed Watch Tool became the single most visited page on the CME Group website. Over a million views to that page were complemented by more than 600 media articles and 300 TV and radio references in 2016.

What’s Ahead

The Fed’s March meeting may give an indication about how many increases to the Fed Funds rate we’ll see this year. In addition to Yellen’s guidance that an increase “would likely be appropriate,” watch the Fed Watch Tool for where traders are viewing the direction of Fed Funds. In a volatile market, interest is sure to remain high.

Agha Mirza is Managing Director and Global Head of Interest Rate Products at CME Group.

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