Traders Are Betting More Aggressively Ahead of Economic Data

Traders Are Betting More Aggressively Ahead of Economic Data

Bond traders are laying down wagers hours ahead of key readings on the U.S. economy, a sign of confidence that they know how new data will shift markets.

After the pandemic’s disruptions and the Federal Reserve’s fastest interest-rate hiking campaign in decades, many now feel like they know which way the central bank and the economy are generally headed. Investors expect the Fed to begin trimming interest rates later this year, so the data mostly shifts their expectations for when.

Highly traded futures markets tied to U.S. Treasurys are posting sharp moves leading up to major reports on jobs, inflation and economic growth, according to an analysis of trading since the start of 2022 prepared for The Wall Street Journal by Alexander Kurov, professor of finance at West Virginia University.

Bond futures typically swing 0.14 percentage point in reaction to seven key economic releases, Kurov found. Nearly half of that move has already happened before the data comes out, kicking off up to six hours ahead of the scheduled announcement. That marks a shift from earlier years, when preliminary moves tended to concentrate in the half-hour or so before the data.

“The price drift starts much earlier than we found in our previous research,” said Kurov. “Traders know if they start betting five minutes before an announcement, it’s kind of too late.”

Aggressive positioning threatens to rattle an already unsteady market. Bonds have been volatile since the Fed started tightening roughly two years ago. The 10-year Treasury yield, a benchmark for lending rates that rises when bond prices fall, is nearing two years of relatively sharp daily swings.

Few think anyone is cheating. Research from Kurov and others previously suggested early trading could stem from data leaks, but the Labor Department then stopped sending early results to the media in 2020. Suspicious trading in the U.K. several years ago spurred policymakers to make changes to their early-distribution policies. There is also a timing component—futures often begin moving around the opening of European markets.

Instead, analysts said the moves show traders are growing more convinced that they can guess both what the data will show and which direction markets will head afterward.

Trying to anticipate a move is still no easy task, said Lundy Wright, portfolio manager at Weiss Multi-Strategy Advisers, a New York-based hedge fund. Releases are muddy, overlap, or coincide with other market-moving events. Even when traders think they know what the data will show, they also have to consider whether that aligns with their overall view of the economy.

And one danger is that the early trading results in sharper-than-expected moves when data surprises investors, who must race to adjust.

On Thursday, bond yields climbed in the hours ahead of the release of the personal-consumption expenditures price index, the Fed’s preferred inflation gauge. Traders were betting the data would come in hot, similar to the consumer- and producer-price indexes earlier in the month. When the results were in line with forecasters’ projections, yields sank immediately after the report.

But investors these days can conduct sophisticated analysis ahead of time, using new tools such as artificial intelligence. The broad availability of such information increases the incentive to make an early bet. Wait too long, and the market might already have moved.

“We monitor who has the hot hands—what forecasters have the best predictability over the past three and six months,” said Wright. “It’s sort of like betting alongside a betting expert.”

The hedge fund Weiss, which managed $4.2 billion of client assets at the end of last year, told investors on Friday that it is winding down, according to a memo viewed by The Wall Street Journal.

Of the 30 major economic indicators, Kurov found 12 that significantly move the Treasury market, seven of which show traders betting correctly ahead of time. One area that has worked is jobless claims, where advanced trading captures more than one-third of the overall move, according to Kurov. A weaker-than-expected report Thursday helped spur the market recovery after the PCE data.

Traders seem to struggle with wagering ahead of a few of the most-watched releases, however, particularly the biggest reports on jobs and inflation: nonfarm payrolls and the consumer-price index. Those still spark big moves in bond yields, but the advanced moves don’t tend to prove prescient.

Those two reports provide investors with their most-direct look at the potential course of interest rates, which play a determining role in setting bond prices. They can also be noisy. Analysts said that increases the risk of posting big bets ahead of time, which may boost traders’ patience.

And some warn that the path of rates is likely more winding than it seems. The pandemic era has upended a lot of Wall Street predictions about the economy’s direction. Traders that are overly confident that they know the future could be in for surprises.

“The Fed has been data-dependent many times, but I don’t think the data has ever been as difficult and volatile for them to read,” said Chris McAlister, global head of derivatives trading at Prudential.

Write to Eric Wallerstein at [email protected]