Bond Traders Cast Doubt on Extended Fed Rate Cuts Past December
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Bond traders are betting on a shallower path of Federal Reserve interest-rate cuts in the year ahead, part of a global move to wager that major central banks will slow or halt their monetary easing.Author of the article:You can save this article by registering for free here. Or sign-in if you have an account.(Bloomberg) — Bond traders are betting on a shallower path of Federal Reserve interest-rate cuts in the year ahead, part of a global move to wager that major central banks will slow or halt their monetary easing.Subscribe now to read the latest news in your city and across Canada.Subscribe now to read the latest news in your city and across Canada.Create an account or sign in to continue with your reading experience.Create an account or sign in to continue with your reading experience.Beyond Wednesday’s expected quarter-point cut, traders now anticipate a half-point of total reductions by the US central bank in 2026, mostly front-loaded into the year’s first half, futures and options trading shows. It’s an abrupt turn from just a week ago, when interest-rate swaps were pricing in closer to three rate reductions for next year. A similarly swift hawkish repricing has been emerging in economies including Australia and New Zealand, and most recently Canada and the euro region.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againInterested in more newsletters? Browse here.In the US, the shift has occurred before the release starting next week of key delayed labor-market data, which will likely determine whether the market’s current view on the Fed will hold. On Tuesday, a measure of US job openings beat estimates. The data nudged Treasury yields higher and underscored policymakers’ challenge as they meet this week at a time when inflation remains elevated.Against the backdrop of stubborn price pressures, deeper rate cuts may call into question the Fed’s inflation-fighting credibility, said Lauren Goodwin, chief market strategist at New York Life Investments. “We are modestly more hawkish than the market” on the Fed’s path, she said. “A Fed hike is absolutely a risk” in 2026, although it’s not their base case, she said.The diminishing expectations for Fed rate cuts is starting to play out in futures linked to the Secured Overnight Financing Rate, which closely tracks the central bank’s policy path. On Tuesday, the spread between the December 2025 contract and the one for December 2026 was the least negative since June, reflecting the reduced amount of easing traders see by the end of next year. In SOFR options, flows in recent days have been heavily skewed toward dovish hedges. But they have continued to target the first half of next year. The positioning signals traders are hedging against a scenario where the Fed wraps up its cutting cycle by around mid-year, before pausing.SOFR Traders Target Hedges on Multiple Fed Rate Cuts by Mid-2026Of course, the rates market’s current stance will hinge on whatever the Fed signals on Wednesday regarding its expectations for the year ahead. Then comes November labor-market data to be released on Dec. 16, with the December jobs report due Jan. 9 — in the leadup to the Fed’s next policy decision, on Jan. 28. Meanwhile in cash Treasuries, bullish momentum has also faded, with the benchmark 10-year yield around the highest since September. A weekly survey JPMorgan Chase & Co. survey released Tuesday showed that Treasury investors continue to unwind long positions, shifting into neutral. Here’s a rundown of the latest positioning indicators across the rates market: JPMorgan Survey For the week ending Dec. 8, investors’ net-long positions dropped to the lowest in about five weeks after they cut outright longs by 6 percentage points, shifting into neutral, according to the JPMorgan survey. Neutral positions in the all-client survey rose to the most since Aug. 25.Dovish SOFR Options AddedIn SOFR options out to the Jun26 tenor, open interest has surged across a number of March 2026 call strikes, following consistent demand over the past week for upside structures targeting additional rate-cut premium to be priced into the first quarter. Stand-out flows have included buyer of Mar26 96.625/96.8125 2×1 call spreads and 96.625/96.75 call spreads. The past week has also seen significant liquidation in SOFR Dec25 96.25 calls, where open interest has dropped by approximately 80,000 options. In SOFR options across tenors out to the Jun26 contracts, the 96.25 strike remains the most populated due to outstanding demand for upside call structures involving the level in Dec25 options. There also remains a significant amount of open interest in 96.25 Dec25 puts, despite some liquidation in the strike seen over the past week.
Treasury Options PremiumThe premium paid on options to hedge Treasuries risk over the past week has shifted to favor put premium over calls in the long-bond contracts, where the 1-month 25 delta has moved to the most negative since August. Premium to hedge front-end out to 10-year notes remains close to neutral. On Monday, US 30-year yields peaked at 4.83%, highest since Sept. 5. Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. You will receive an email if there is a reply to your comment, an update to a thread you follow or if a user you follow comments. Visit our Community Guidelines for more information.