Bond traders are betting that the Federal Reserve's rate-cutting path over the coming year will be shallower and shorter than previously expected, part of a global market bet that major central banks will slow or stop monetary easing.
In addition to the 25 basis point rate cut expected on Wednesday, traders now expect the central bank to have only 50 basis points of room to cut rates in 2026, most of which will be concentrated in the first half of the year, according to futures and options trading.
The weakening of expectations for Fed rate cuts is already starting to show up in futures linked to the secured overnight funding rate (SOFR), which closely tracks the central bank's policy path. On Tuesday, the spread between the December 2025 contract and the December 2026 contract was the narrowest since June, reflecting traders' belief that easing has diminished by the end of next year.
In SOFR options, flows in recent days have been heavily skewed towards dovish hedging. But they are still mainly targeting the first half of next year. The position signals that traders are hedging against a scenario in which the Fed ends its rate-cutting cycle around the middle of next year and then pauses.
Bond markets are betting on an early end to the Fed's easing cycle
2025-12-10 02:48:49
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