Why traders are already betting on rate cuts one year from now

by Edward Bolingbroke 

US rates traders have amassed a record futures bet that the Federal Reserve will take on a more dovish tilt right after Chair Jerome Powell’s term ends in May 2026. 

The trade saw record volumes on Monday and swelled further Tuesday. The wager is that whomever President Donald Trump appoints to follow Powell will lead the central bank to cut interest rates almost immediately. The Fed’s first scheduled meeting under the new chief would come in June 2026.  

For months, the president has been pressing Powell to lower borrowing costs, even as Fed officials have signaled that they plan to hold tight and monitor how Trump’s tariffs will ripple through the economy and impact inflation. The central bank is widely expected to keep rates steady Wednesday, and potentially pencil in less easing this year given the risk that levies will lift consumer prices. 

The futures wager has been building in the market linked to the Secured Overnight Financing Rate, or SOFR, which closely tracks the outlook for Fed policy. It has gained momentum since Trump said this month that he would name a successor “very soon.” 

“Trump could choose a replacement that is clearly more sympathetic to easier monetary policy, even though that may make it harder to get his pick through the congressional ratification process,” Steven Barrow, head of G-10 strategy at Standard Bank, wrote in a note. 

Analysts including Will Denyer, an economist at Gavekal Research, cited the risk that an early nomination by Trump could lead to almost a year in which investors will focus on the pronouncements of the “shadow” Fed chair, along with signals from Powell.  

“The cacophony could inflict another shock on market confidence in US policymaking,” Denyer wrote.  

Monetary policy, to be clear, is set by a committee of Fed officials. The chair doesn’t unilaterally set policy rates. 

The bet in rates futures involves selling the March 2026 SOFR contract and simultaneously buying the one expiring in June 2026 — the equivalent of a three-month spread trade, and it’s causing disruptions across futures covering the first half of next year.  

The heavy selling in the March contract is causing it to cheapen by an outsized amount relative to other maturities, in particular those expiring in December 2025 and June 2026. As a result, the fly position — or the relative spread — around the March 2026 futures has spiked to the widest since January.  

Volumes in the futures position hit a record 108,649 contracts on Monday, equivalent to approximately $2.7 million per basis point in risk. Open interest in both the March 2026 and June 2026 futures has reached the largest in the current policy cycle, partly as a result of demand for the trade. 

Trading in many of these contracts is anonymous, making it difficult to identify the firms involved and the exact details of the trade.  

On Wednesday, the focus will be on Fed officials’ forecasts, and the expectation is that the median participant will likely anticipate one quarter-point cut in 2025. In their previous economic projections, released in March, the median forecast was for two quarter-point cuts by year-end. 

Traders, for their part, are pricing in that Federal Open Market Committee members will deliver roughly 43 basis points of total easing by year-end, with a quarter-point reduction seen as soon as September, but more likely in October. 

Here’s a rundown of the latest positioning indicators across the rates market: 

JPMorgan Treasury Client Survey 

In the cash market, JPMorgan Chase & Co.’s Treasury client survey for the week to June 16 showed outright short positions dropped 3 percentage points to the fewest since May 5.  

Most Active SOFR Options 

In SOFR options across the Sep25, Dec25 and Mar26 tenors, there was a decent amount of new risk seen in both 95.875 and 95.625 strikes following recent flows including a buyer of the SFRU5 95.875/95.75/95.625 put tree. Jump in risk seen in 95.5625 appeared mostly down to buyer of the Sep25 put outright last week. Liquidation flows over the week included seller of the SFRU5 96.25/96.50 call spread while rolling strikes were also seen via SFRU5 96.00/95.75/95.50 put fly bought vs selling SFRU5 96.1875/95.9375/95.6875 put fly.  

SOFR Options Heatmap 

The 95.625 strike remains most popular across Sep25, Dec25 and Mar26 options with large amount of risk seen in the level via Sep25 puts and Dec25 puts. Other populated strikes include 95.75 and 95.875 where Sep25 puts are prominent. Recent flows in the strikes have included buyer of the SFRU5 95.875/95.75/95.625 put tree while there has also been big buying in the SFRZ5 95.625/95.375 put spread.  

Treasury Options Skew 

Traders are continuing to pay increasing premiums to hedge a selloff in the long-bond contract on both an outright basis and relative to the front and belly of the curve. Long-bond skew, however, has been drifting closer and back to neutral over the past week as 30-year yields have run into resistance around the 5% level. Skew on tenors on the 2-year out to the 10-year are slightly favoring calls, indicating traders are now paying a premium to hedge a rally across the front end and intermediates, relative to wagers on a selloff.  

CFTC Futures Positioning 

Hedge funds unwound net short positioning in the long end of the curve, in the week ended June 10, CFTC data shows. They covered a combined $9.9m/DV01 to net short in long-bond and ultra-long bond futures over the week. Asset managers added to 2-year futures net long by $4.3m/DV01 on the week, while cutting net long in long-bond futures by $3.6m/DV01. In SOFR futures, asset managers unwound roughly $1.5m/DV01 to net long position.