In September, the market widely expected the Federal Reserve to cut interest rates by 25 basis points in both November and December. However, following the release of various economic data and Trump’s return to the political scene, analysts now suggest that the Fed’s rate path is filled with uncertainty, making future moves unpredictable.
To prevent the significant rate hikes of the past two and a half years from unnecessarily dragging down economic growth, the Fed approved a 25-basis-point rate cut on Thursday, while hinting at more uncertainty regarding the pace of future rate cuts.
The market has already reduced bets on another rate cut in December. The CME’s rate watch tool indicates a 32% chance that the Fed will keep rates unchanged in December, a significant increase from 14% a month ago.
Fed Chair Jerome Powell stated that the U.S. election would not impact Fed decisions in the short term and that it’s too early to predict how policies under the next administration might reshape the economic outlook.
According to Citi data, investors in the interest rate futures market have steadily lowered their expectations for Fed rate cuts over the next year. They now project the Fed will reduce rates to about 3.6% by 2026, compared to an estimated low of 2.8% in September.
Fed officials are trying to restore rates to a more "normal" or "neutral" level that neither stimulates nor restrains economic growth, though they are uncertain what rate level qualifies as "normal."
As for next year’s monetary policy, the shock brought by Trump cannot be ignored. Powell emphasized that changes in fiscal policies, such as tax cuts, require substantial time for Congressional approval and even more time to impact the economy, to which the Fed must respond.
U.S. Treasury bonds could see a reversal with weakening U.S. economic data. Treasury bond investors, who typically find it challenging to hold large amounts of cash tied up in bonds, could potentially earn higher profits than with stocks by using a strategy of selling put options, without tying up as much cash.
What is Selling a Put Option?
Selling a put option is an options trading strategy where a trader sells a put option, also known as an uncovered or naked put. If the investor sells a put option, they are obligated to buy the underlying stock shares if the option buyer exercises the option.
Traders who sell put options may believe the stock price will remain above the strike price of the sold put option. If the underlying price stays above the strike price, the option expires worthless, and the seller retains the premium. If the price falls below the strike price, the seller could face potential losses. Some traders also use put options to purchase the underlying security at a lower price.
Example of Going Long on U.S. Treasuries
The U.S. Treasury bond ETF, $20+ Year Treasury Bond ETF - iShares (TLT), currently priced at 91.93, allows investors to take long positions in Treasury bonds by selling put options at different strike prices, adjusting the “leverage” on their Treasury positions.
By selling in-the-money put options, investors can take a stronger long position on Treasury bonds. Optimistic investors could choose to sell put options with a strike price of 100 for the same expiration date. If executed, investors could benefit from any price increase between 92.5 and 100 in Treasury bonds by January 16, 2026, and would gain additional premium compared to stocks.
Compared to buying stock directly, selling in-the-money put options requires less cash from the account, can yield higher returns, and frees up funds for other trades.
However, selling put options comes with risks. Profits are limited to the premium received, but potential losses can be significant. If the buyer exercises the option, the seller must purchase the underlying asset at the strike price, and if the asset's price drops below the strike price, the put seller may face considerable losses.
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