Bessent is confident that the US will see its GDP grow faster than its debt increases. He is skeptical about the Congressional Budget Office’s (CBO) growth predictions, thinking they might be too negative or based on unlikely assumptions. The tax bill vote is scheduled for 1:30 PM, as mentioned during a CNBC interview.

Economic Growth Versus Government Debt

Bessent believes the US economy will grow faster than government debt. He questions the CBO’s forecasts, thinking they might be overly cautious. The timing of the tax bill vote could influence interest rates and stock prices, depending on how the market views its long-term impact on the budget and growth. This moment is crucial for those dealing with rate-sensitive products, especially since volatility has decreased recently. Rate markets are trying to figure out how much fiscal stimulus might occur, making short-term contracts a primary focus. While longer-term rates have moved somewhat, traders may still be preparing for unexpected changes. Yields are slowly adjusting, driven mainly by traders reducing their hedges on 2-year and 5-year instruments. It’s a gradual shift back to neutral after weeks of uncertainty. This is important to watch, especially if the tax bill passes with changes that raise projections.

Market Positioning and Reactions

We see that the skew in rate volatility has become quite lopsided since Monday. Trades aimed at exploiting this imbalance are experiencing lower offers. Additionally, teams dealing with different assets have begun to adjust volatility rates in response to the renewed fiscal discussions, suggesting that equity-related hedges may begin to affect the rates market. Sterling products remain mostly isolated, but this could change quickly. Clear signals about US policy usually influence EUR and GBP volatility due to rebalancing in CTA baskets. Traders using synthetic curves or steepener strategies may want to consider the impact of a significant shift in US policy bias. As the vote approaches, implied volatility in near-term contracts has increased by about 1.5 vols since yesterday, showing a growing demand for protection or participation linked to events. Any further rise in volatility may lead to calendar spreads among larger macro investors. Our trading activity this week has focused on the middle of the curve, where differences between implied and realized volatility are creating better entry points. While there’s no widespread panic, there is a strong interest in gamma, particularly for swaption hedges. This indicates that while real money isn’t looking to take major risks, they are not willing to stay unprotected. Bessent’s comments and the approaching vote suggest we may see short bursts of movement rather than a long-term trend. Directional trades may gain more traction after the vote. For now, short-term options offer clearer reward-to-risk ratios, especially since intraday volatility often settles by the end of the day. With volatility already priced in and gamma in demand, maintaining low delta exposure may provide better flexibility. Create your live VT Markets account and start trading now.

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