Bond traders are upping their options bets, expecting the Fed to implement at least one 50 basis point rate cut at its three remaining policy meetings this year.
Officials are expected to cut rates on Wednesday for the first time in 2025, with a 25 basis point cut seen as the most likely outcome. But while inflation remains sticky, a cooling labour market is prompting some traders to hedge against the risk of a worsening economic outlook leading to more aggressive rate cuts in coming months.
This week's trading flows related to the secured overnight funding rate (SOFR), which is highly sensitive to Fed policy expectations, show rising demand for December options contracts that expire two days after the Fed's December 10 policy statement.
These positions would profit from two cumulative 50 basis point cuts or three cumulative 25 basis point cuts at the Fed's September, October and December meetings. The trades reflect a more dovish path than the swaps currently priced in, which are expected to reduce interest rates by about 70 basis points by the December meeting.
Traders are ramping up bets: the Fed is expected to initiate a 50 basis point sharp rate cut before the end of the year
2025-09-17 00:52:40
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