The Federal Reserve's interest rate cut expectations have changed! The market is betting real money that there will only be one rate cut this year and is even starting to accept "no rate cuts for the entire year."

According to Zhitong Finance APP, an increasing number of Wall Street traders are shifting their bets to expect that the Federal Reserve will only cut interest rates once this year instead of the previously anticipated two cuts. The main logic behind this shift is the resilience of U.S. economic growth and the persistent signs of inflation. On Wednesday, the U.S. consumer price data for May (i.e., May CPI) will be released, and the market predicts a slight rebound in this data, which may reinforce the Federal Reserve's stance of remaining cautious and not further easing as it assesses the impact of tariffs. The market generally expects the Federal Reserve to remain on hold next week, while futures and options pricing tracking policy paths show that traders are reducing the accumulated rate cut premium for the coming months.

Swap traders currently generally expect the Federal Reserve to cut rates by only about 0.45 percentage points by the end of the year, with some traders even betting on "no rate cuts for the entire year of 2025." This represents the smallest expected cut since the high tariffs were introduced by the Donald Trump-led U.S. government upon returning to the White House in early April. The announced tariff policy had once caused severe turbulence in global financial markets and subsequently led traders to bet on a maximum rate cut of 1 percentage point by the end of the year.

Stronger-than-expected non-farm payroll data for May has prompted more traders to exit aggressive bets on Federal Reserve easing. However, the interest rate outlook had already shifted in this direction, partly due to signs of easing global trade tensions—this trend became more evident after talks between China and the U.S. in London this week.

After high-level economic and trade discussions between China and the U.S. announced a temporary reduction in tariffs on various goods within 90 days while seeking a broader trade agreement, the Federal Reserve's decision to maintain its monetary policy stance appears increasingly wise, and Wall Street's bets on Federal Reserve rate cuts have significantly cooled.

Goldman Sachs' team of economists believes that the Federal Reserve is still likely to implement monetary policy normalization and rate cuts after the negative effects related to tariffs dissipate and the temporary inflation shocks significantly ease. Goldman Sachs expects the peak inflation effects of tariffs to manifest in the inflation reports from May to August and initially predicts the first rate cut to occur in December.

Economists from another Wall Street giant, Barclays Bank, predict that the Federal Reserve will only implement one rate cut in 2025, expected in December, followed by three additional cuts of 25 basis points each next year (anticipated in March, June, and September 2026). Before reaching a positive trade consensus and significantly reducing each other's tariffs, Barclays' economists expect two rate cuts of 25 basis points each this year, anticipated in July and September.

Expected Federal Reserve rate cuts by the end of the year—swap market expectations have dropped from over 100 basis points in April to less than 50 basis points.

In terms of market pricing trends, there has been an increase in hedging trading activities in the options market linked to the Secured Overnight Financing Rate (SOFR), targeting the Federal Reserve to cut rates only once this year or even not at all In Monday's trading data, there was strong demand for newly established hawkish protective positions of various structures, targeting the end of this year to early 2026. Tuesday's open interest data showed that these were all new positions. Such bets will appreciate as the embedded Federal Reserve rate cut pricing in futures fades.

The following is an overview of the latest position indicators for U.S. Treasury cash and interest rate markets:

JP Morgan Treasury Client Survey

In the cash pricing market, JP Morgan's U.S. Treasury client survey released on Tuesday indicated that as of the week ending June 9, investors' net long positions rose to the highest level since May 5. During that week, investors reduced their short positions by 2 percentage points, while neutral positions increased by the same amount.

The cash market pricing data for Treasury bonds shows that, with the May CPI about to be released and the Federal Reserve FOMC monetary policy decision approaching, JP Morgan's U.S. Treasury trading clients are willing to lock in profits and reduce risk exposure: they are no longer aggressively shorting U.S. Treasuries, but have not significantly increased their long positions, reflecting recognition and caution regarding the expectation of "only one rate cut by the Federal Reserve this year," especially as institutional investors have reached a consensus on maintaining high interest rates for a longer duration. In other words, positions are being reduced rather than increasing long positions—consistent with the swap market's pricing of only about a 45 basis point rate cut in 2025.

JP Morgan All Clients Treasury Position Survey—JP Morgan Client Net Long is the Largest Since May 5

Most Active SOFR Options

In the Jun25, Sep25, and Dec25 SOFR options contracts, the Dec25 95.375 strike put option has become a new risk concentration point, due to a large number of purchases of the SFRZ5 95.625/95.375 put spread, betting that the Federal Reserve may not cut rates this year. Similarly, the hawkish hedge formed by buying the SFRZ5 95.8125/95.6875/95.5625 put butterfly has made the 95.8125 strike price actively traded. In the past week, new positions have also appeared at the 96.75 strike price, such as buying the SFRZ5 96.25/96.75 1×2 call spread.

Recently, there has been a large number of purchases of put structures in the 95.375–95.625 range, targeting points corresponding to "only one rate cut or simply no cut," indicating that hedge fund professionals are also hedging against the risk of further evaporation of rate cut premiums.

The 95.8125 trident butterfly, which involves buying the 95.8125/95.6875/95.5625 put fly, means that if SOFR falls below 95.8125 but not below 95.5625, the position value is maximized; highlighting that market participants are betting on interest rates remaining high this year while limiting extreme bet losses. Buying the SFRZ5 95.625/95.375 put spread means targeting SOFR prices ≤ 95.375 (implying a 4.625% interest rate), corresponding to a hawkish scenario expectation of no rate cuts this year The latest large-scale Put spreads and butterflies for SOFR options are concentrated in the 95.375-95.8125 range, clearly betting on "the Federal Reserve will cut rates at most once in 2025, or even not at all"; at the same time, a small amount of 1×2 Calls remains as a hedge for the "extremely dovish" tail. Combining swap and cash positions, the current core scenario in the market is: short-end hovering at high levels, and the yield curve slowly steepening, unless inflation significantly cools down, it will be difficult to reignite the market's rate cut premium.

Most Active SOFR Option Strike Prices - Top Five and Bottom Five Weekly Net Changes in SOFR Option Strike Prices

SOFR Option Heatmap

The 95.625 strike will remain the most concentrated position in the Jun25, Sep25, and Dec25 contracts, mainly from the recently traded SFRM5 95.75/95.625 Put spread. Since the unexpected non-farm payroll data was released last Friday, SOFR options have shown hawkish hedging again, mainly due to the continued evaporation of rate cut premiums in futures over the next 18 months, with short structures mainly targeting Dec25 and Mar26 Puts.

SOFR Options Open Interest - The 20 Most Popular Option Strike Prices for Jun25, Sep25, and Dec25

According to reports, macroeconomic analysts from Morgan Stanley expect that inflation pressures related to the tariff policies led by Trump since April will prevent the Federal Reserve from cutting rates in 2025, meaning Morgan Stanley expects the Fed will choose "not to cut rates" this year. Morgan Stanley stated that this hawkish policy stance regarding the Fed not cutting rates may be priced in by the market, which could significantly extend the time that the U.S. Treasury yield curve, especially long-term Treasury yields, stays within the range formed over the past two years, beyond investors' expectations.

Treasury Option Skew

Wall Street traders continue to pay higher premiums to hedge against the selling risks of long-term Treasury contracts due to the ongoing expansion of the budget deficit, both in absolute terms and relative to the front end and mid-section of the curve. However, as the 30-year yield is blocked around 5%, the skew of long bonds has trended towards neutral indicators over the past week; the skew of 10-year Treasuries is also close to balance, highlighting the market's expectation that the Fed will only cut rates once, with some market participants even accepting the expectation of "no rate cuts for the entire year," while CTA accounts may be establishing new long positions in TY contracts.

CFTC Futures Positions

According to CFTC statistics, as of the week ending June 3, Wall Street asset management institutions actively increased their net long positions in U.S. Treasury futures, with a total increase of approximately 452,000 contracts equivalent to 10-year U.S. Treasury bonds, marking the largest weekly increase since April of last year. Notably, the majority of the new net longs were concentrated in contracts with maturities exceeding 10 years, equivalent to a net long risk of approximately 11.3m/duration profit and loss (DV01).