Options traders are increasing their bets that the broader market is overestimating the extent of the Federal Reserve's interest rate hikes this year. This dovish shift began last week. Federal Reserve Governor Christopher Waller stated at the European Central Bank's forum in Sintra, Portugal, that inflation risks have recently diminished. Since then, options flow tied to the Secured Overnight Financing Rate (SOFR) has consistently favored positions that would benefit from a fading of rate hike expectations in the swap market. SOFR closely tracks the central bank's policy path.
BMO Capital Markets strategist Will Hartmann wrote in a report: "Compared to the remarks at the June 17 press conference, Waller's Sintra forum comments were interpreted as less hawkish, although in absolute terms, these remarks certainly were not dovish."
A particularly notable position this week exemplifies this hedging activity—buying SOFR call options, betting on a complete shift in the Fed's policy stance, meaning the central bank would cut rates rather than raise borrowing costs before the end of this year. This bet is a continuation of last week's trend. Demand for similar hedges emerged after Waller appeared to soften his stance on inflation and the June jobs report came in weaker than expected.
This contrasts sharply with positions accumulated just before the Sintra forum, when demand for bets on a rate hike as soon as this month was heating up. In the current macro environment, some strategists are beginning to question the swap market's pricing of Fed policy tightening. As Middle East tensions ease, oil prices are falling back to levels seen before the late February outbreak of the war, and this decline in oil prices is alleviating overall inflation concerns.
The swap market currently prices in about 32 basis points of rate hike premium by year-end, implying the possibility of one to two 25-basis-point hikes across the four remaining policy meetings this year. Citigroup strategists, including Andrew Hollenhorst, noted in a report: "Fed officials and market pricing for rate hikes have not yet reflected the drop in oil prices and other disinflationary signals as quickly as the inflation market has."
Here is an overview of the latest positioning indicators in the rates market:
JPMorgan US Treasury Client Survey
For the week ending July 6, investor long positions decreased by 5 percentage points, shifting the overall stance to neutral, while short positions remained unchanged.
SOFR Options Positioning
In options expiring in September 2026, December 2026, and March 2027, significant new risk has been added across multiple strike prices for December 2026 puts, primarily driven by concentrated buying of the SFRZ6 96.1875/96.0625/95.75/95.625 put butterfly spread—a strategy that has been highly sought after recently.
Over the past week, the 96.3125 strike has also been active, with demand emerging for the SFRZ6 96.0625/96.3125/96.50 call condor and the SFRZ6 96.125/96.3125/96.50 put butterfly spread.
The 96.50 strike remains the most heavily populated level, with large open interest in call options expiring in September and December 2026 at that price. Additionally, over the past few weeks, open interest has increased notably for September 2026 call options at the 96.75 strike, which saw a large direct purchase of 1.25 basis points. The 96.375 strike was also active over the past week, with related flows including purchases of the SFRU6 96.25/96.3125/96.375 call condor.
Treasury Options Skew
Over the past week, as the 30-year Treasury yield recovered to around 5%, the premium paid for options hedging long-end Treasury futures widened slightly, with puts being favored. For the front-end and belly of the futures curve, option premiums remain near neutral.
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