The Washington Resolution Reaches Cliffhanger Ending as Options Activity Suggests Some Investors Are Betting on Rate Hike

July 29th, the Federal Reserve is currently at a crossroads of turmoil. With current Chair Kevin Wash hinting multiple times at breaking the market convention of "forward guidance," the interest rate decision to be announced this Wednesday has become the most unpredictable suspense in recent years.

Citadel Securities has boldly predicted an "unexpected rate hike" this week. The institution believes that Wash may use this move to declare the end of the era of "forward guidance" by inflicting short-term pain on the market to rebuild the Fed's independence.

On the other hand, the iShares 20+ Year Treasury Bond ETF (TLT) has recently shown a strong bullish tendency. Data shows that TLT's put/call ratio has dropped to 0.63, the lowest since May. This Tuesday, TLT's call options saw a trading volume of up to 171,000 contracts, three times that of put options. Convexitas Chief Investment Officer Zed Francis revealed the logic behind this "yield curve twist": if Wash decisively hikes interest rates, the market will see it as the ultimate determination to fight inflation, causing long-term inflation expectations to collapse, leading to a decline in long-term yields (bond price increase). This means that a hawkish rate hike may instead serve as a bullish signal for long-duration treasuries and tech stocks like the Nasdaq 100.