(Bloomberg) — Traders are betting on a slower pace of interest-rate cuts from the Federal Reserve this year, with economic resilience forcing policymakers to remain on hold for longer before easing more sharply in 2026.
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Just a day ahead of the US central bank’s latest policy decision, money markets are pricing three quarter-point reductions this year, one less than at the start of April. About a half point of additional cuts are expected next year, the most priced in for 2026 at any point in the current easing cycle.
Traders will be scrutinizing comments by Fed Chair Jerome Powell on Wednesday — when the central bank is expected to keep its benchmark rate steady at 4.25%-4.50% — for clues on whether President Donald Trump’s economic policies are prompting any change in policymakers’ view on the timing for further rate cuts. Prior to the customary, pre-decision blackout period, officials urged patience, particularly with higher US tariffs set to fan near-term inflationary pressures.
Market expectations for a cut at the June policy meeting have also faded since Friday, when employment data came in stronger than economists predicted. Monday’s April ISM services data also hinted at economic strength, adding to pressures for front-end yields which are particularly sensitive to monetary policy.
“Unless something bad happens between now and June, it means the Fed doesn’t need to go,” said Kevin Flanagan, head of fixed income strategy at Wisdom Tree. Short-term yields are vulnerable given that the Fed in March had forecast two rate reductions this year, he added.
Traders are also positioning for later rate cuts in options markets. For example, the maturity date of one particular position hedging against deep cuts was just extended for the second time in a couple weeks.
Open interest data from the CME showed a considerable amount of de-leveraging and position unwinds in the front end of the curve after the April payrolls, consistent with liquidation of long positions.
In the cash market, conviction remains light as investors grapple with Trump’s trade policies and their potential impact on central bank policy. Tuesday’s JPMorgan Treasury client survey showed neutral positions remain elevated and close to yearly highs.
Here’s a rundown of the latest positioning indicators across the rates market:
JPMorgan Treasury Client Survey
In the week up to May 5, JPMorgan clients increased long positions by one percentage point, shifting out of neutrals with short positions unchanged. Outright longs are at a three-week high, although neutral positions remain most elevated.
Most Active SOFR Options
Across SOFR options out to the Dec25 tenor, the 95.75 strike was active in the past week due partly to buying of the Jun25 95.9375/95.75 put spread and the Sep25 95.875/95.75/95.6875/95.5625 put condor. The 97.25 strike was also used heavily over the past week, partly due to buying in the Dec25 96.75/97.25 call spread for new risk, where a position of around 75k has now been built.
SOFR Options Heatmap
In SOFR options across Jun25, Sep25 and Dec25 tenors, the most populated strikes remain the 95.625 and 95.75 strikes, helped by large positioning around the Jun25 puts via the SFRM5 95.75/95.625 put spread, which has recently traded. The top three most-populated strikes all contain a large amount of June 2025 put exposure.
Treasury Options Skew
Over the past week options skew on the long-bond futures has favored puts, as traders pay a premium to hedge a selloff in the long-end of the curve versus a rally. In short and intermediate tenors the skew on options continues to favor calls, implying traders are paying a premium to hedge a rally in the front and belly of the curve versus a selloff. The skew reflects the steepening price action seen on the curve, as 5s30s spread topped at 100bp last week and widest since October 2021.
CFTC Futures Positioning
Leverage continues to extend as both asset managers increase net duration longs and hedge funds net duration shorts across Treasury futures, according to CFTC data up to April 29. Asset managers have now increased net duration long over the past 8 consecutive weeks for a combined 1.3 million 10-year note futures equivalents. Over the past five weeks hedge funds have added approximately 1 million 10-year note futures to net short position. In latest week, the biggest shifts were in the 5-year notes where asset manager net long was extended by $7.4m/DV01 while hedge fund net short grew $7.7m/DV01.
—With assistance from Michael Mackenzie.
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