Bond traders are increasing their wagers that the Federal Reserve's next policy move could be an interest rate hike rather than a cut. Interest rate swaps linked to the central bank's decisions now indicate a greater than 50% probability of a Fed rate increase by next April, before any potential shift toward easing. Concurrently, a growing number of traders are building positions to hedge against the risk of rising odds for a hike before the end of this year. This market shift is occurring as policymakers appear increasingly divided on the interest rate outlook, and as Kevin Warsh is set to take over as Fed Chair amid pressure from US President Donald Trump to lower rates. Lawrence Gillum, Chief Fixed Income Strategist at LPL Financial, noted that while the possibility of rate cuts this year still exists, it is diminishing as conflicts with Iran persist. "There's no question Warsh faces a difficult path ahead," he stated. These bets are reflected in futures and options markets tied to the Secured Overnight Financing Rate (SOFR), which closely tracks policy expectations. Trading activity intensified ahead of Friday's US jobs report, which is anticipated to show labor market stabilization, thereby bringing inflation risks to the forefront for investors. "If the labor market stabilizes, the Fed will be able to focus on countering an oil price-driven inflation shock and hold off on considering rate cuts for now," wrote Evercore ISI senior economist Marco Casiraghi and analyst Gang Lyu in a report. They added that their baseline scenario assumes that geopolitical tensions may delay rate cuts but will not alter the overall direction of easing. In the swaps market, expectations for rate cuts have been pushed back to early 2028. March 2028 Fed funds rate swaps are priced about 8 basis points below the current effective federal funds rate. In the SOFR futures market, pressure is concentrated on the June 2027 contract. This contract has significantly underperformed over recent weeks as traders had not previously factored in the possibility of a rate hike roughly a year later. This has caused the June 2026–June 2027–June 2028 butterfly spread to widen sharply, reaching a cyclical high. "The short end of the US yield curve does not yet substantially reflect the prospect of a potential hiking cycle over the next six to twelve months," said Brij Khurana, Portfolio Manager at Wellington Management. "It is surprising that US markets have not truly priced in a potential rate hike cycle."
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