Ahead of the Jackson Hole meeting, traders are betting on an aggressive rate cut by the Federal Reserve

Traders are piling into a particular option bet that the Federal Reserve will slash interest rates by more than 25 basis points next month. Since the beginning of the month, there has been strong demand for positions related to the overnight guaranteed funding rate (SOFR), which is closely tied to policy expectations. This week, traders are up the ante again, with a sharp climb in unpositioned squaring contracts for a 50 basis point rate cut. Federal Reserve Chairperson Jerome Powell is due to give a key speech in Jackson Hole in a few days. This follows the release of higher-than-expected inflation data in the United States, which led some traders to lower their expectations for a rate cut. Despite a pullback in the short term, traders still seem convinced that interest rates will be cut next month. US Treasuries ended a three-day sell-off on Tuesday, with yields falling across maturities. Ian Lingen, head of US interest rate strategy at BMO capital markets, said: "As the market gears up for Powell's speech, the biggest risk to Treasuries is the Fed chair choosing to pour cold water on the widely expected September rate cut."