Warsh’s rate decision is a cliffhanger. These trades might offer a clue

It’s arguably the most up-for-grabs Federal Reserve decision in recent memory.

Fed chair Kevin Warsh has indicated he’s ready to make decisions without giving market participants an extended heads-up, and for many economists and investors, that type of approach beckons for an interest-rate hike to show all possibilities are on the table.

Those hawks are in the minority, according to Fed Funds futures tracked by the CME Group, which place the odds of a hike at about 35%. Although that is up from 26% odds a week ago. It’s a signal largely corroborated by options flows around the iShares 20+ year Treasury Bond ETF (TLT), as well as SPDR Gold Shares (GLD).

The ratio of put open interest to calls has been steadily moving lower towards calls this month, even as TLT prices are down and the 10-year yield testing multi-year highs, according to Barchart, which shows a put/call ratio of 0.63, down from a high of 0.73 at the start of the month and near the lowest since late May.

At the same time, traders bought 171,000 TLT calls compared to under 63,000 puts in Tuesday’s session, and sold about 91,000 calls, ThinkOrSwim data show. Of the $50 million in TLT premium traded, 72% was in calls, according to SpotGamma.

Now, to be sure – call buying could be a murky indicator for whether or not Warsh hikes. Many investors and economists are arguing that a surprise interest-rate hike would send yields lower, a view that’s corroborated by crucial moments in the Fed’s recent past, like when yields went higher as Jerome Powell cut rates in the second half of 2024.

“It would go a long way to signal Fed independence,” if Warsh hikes, said Zed Francis, co-founder and CIO of Chicago-based Convexitas. “The trade is that a hike causes a twist and the long end rallies.”

Francis added that if the long end rallies, calls in the Nasdaq 100 would help tech stocks that are considered `long duration’ assets.

For clues on whether the call-buying in TLT reflects views of a hike or not, one might look at the action in gold, which generally fares poorly in higher interest-rate environments.

In GLD, traders bought 13,500 calls, compared to under 11,000 puts, with a slightly positive delta imbalance, according to ThinkOrSwim and Barchart – perhaps the tie-breaking point in doves’ favor.