Bond traders are scaling back expectations for Federal Reserve rate cuts next year, now pricing in just 50 basis points of easing concentrated in the first half of 2025. This marks a sharp reversal from swap markets' projection of nearly three cuts a week ago.
The dovish repricing aligns with a global trend of fading monetary easing expectations, with hawkish sentiment resurfacing in Australia, New Zealand, Canada and the eurozone. The shift comes ahead of delayed U.S. labor market data that could cement current market views.
Tuesday's stronger-than-expected JOLTS report pushed Treasury yields higher, underscoring policymakers' challenge as inflation remains sticky. "More aggressive cuts could undermine the Fed's inflation-fighting credibility," said Lauren Goodwin, chief market strategist at New York Life Investments, whose team holds a slightly more hawkish outlook than markets.
SOFR futures now show the narrowest negative spread between December 2025 and December 2026 contracts since June, reflecting reduced easing expectations. While SOFR options still see heavy first-half dovish positioning, traders are increasingly hedging for a mid-2025 pause in the cutting cycle.
The 10-year Treasury yield hovers near September highs as JPMorgan Chase's weekly survey shows investors unwinding long positions to neutral. Key positioning indicators:
- JPMorgan client survey: Net longs fell to five-week lows after 6 percentage points shifted to neutral - SOFR options: Heavy demand for March 2026 call spreads targeting Q1 cuts, alongside unwinding of December 2025 96.25 calls - Treasury options: Put skew emerges with 1-month 25 delta at August lows
The 30-year yield hit 4.83% Monday, its highest since September 5. Goldman Sachs expects this week's likely 25bp cut to come with hawkish signals - including potential dissent from two voters and five officials projecting 3.875% as the appropriate 2025 rate. However, these signals appear largely priced in.
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