As we detailed initially here, and followed here, there is a clear and present danger – no matter what the various Fed speakers say – that the Fed will be forced into negative rates sooner rather than later. The market appears to be losing complete faith in the Fed’s current narrative as bets on NIRP have reached record levels – with 2017 now more likely than 2016 (QE first?).

As we showed previously, the overall bets on NIRP continue to soar to record highs…

[the chart shows the cumulative open interest in par calls on eurodollar futures contracts that expire in 2016 and 2017 – basically options on short-term interest rates with a strike price of zero, such that they pay out if the Fed takes rates negative]

When queried whether this is indeed a trade to bet on a market drop, Michael Green responded as follows:

[A reader] thoughtthis might be an attempt by hedge funds to hedge out their exposure to rising interest rates very cheaply.

My initial idea was that it actually could be a bet on negative rates (if for some reason the Fed had to come back into the picture with QE4).

The bottom line:

“Deep OTM puts on the S&P are very expensive while par ED calls are relatively cheap.

In my view, we are that inflection point where the Fed is going to start to waffle…the bear market beckons and they will not be able to stick with their interest rate guidance. Of course, markets tend to frown on Central Bankers revealed as less than omniscient…“

As the chart above makes clear, since the initial exposure of this trade, open Interest has soared as market fragility, The BoJ’s shift to NIRP (and Peter Panic Policy), along with various Fed speakers indirectly hinting at the possibility. However, as the chart below indicates, it seems 2017 is now the most likely for NIRP to be unleashed…

Which likely means the Fed tries QE in 2016 first, and/or increases its war on cash before negative rates are forced upon Americans.