Guessing game on Fed upping rates to stoke market volatility
Guessing game over whenFed will increase US borrowing costs prompts investors to place bearish contracts on banks, brokerages and insurers
The guessing game over when the United States Federal Reserve will raise interest rates is underpinning bets for more volatility across shares of banks, brokerages and insurers.
Traders are buying up options that pay off if the industry slumps and now own 2.2 puts for each call on the Financial Select Sector SPDR Fund, the most in almost a year.
The cost of one-month bearish contracts is above the five-year average relative to bullish ones and puts make up nine of the top 10 options with the highest ownership.
With so much uncertainty around interest rates, financials could be affected in a big way
Investors are parsing economic data for signs of inflation and improvement in the labour market that may lead the central bank to increase borrowing costs sooner.
In June, policymakers forecast they would raise the federal funds rate above zero next year, without specifying a month.
While higher interest rates may increase bank profit margins on loans and returns from new investments, it can also hurt earnings if borrowing costs rise before the loan yields increase.
"People who own financials are getting nervous," said Joe Kinahan, the chief strategist at online broker TD Ameritrade Holding. "With so much uncertainty around interest rates, financials could be affected in a big way. If we're in this limbo land for a while, some of those stocks will suffer."
The first rise in the federal funds rate will probably be in the third quarter of next year, according to a survey of economists.