The suspense of interest rate cuts fluctuates! As the Federal Reserve's interest rate decision approaches, the market suddenly increases bets on a 50 basis point rate cut

According to Zhitong Finance APP, global U.S. Treasury traders are increasing their options bets, believing that the Federal Reserve will implement at least a 75 basis point rate cut in the remaining three FOMC monetary policy meetings this year, starting with a 75 basis point cut. Meanwhile, the SOFR options trading heatmap shows that some traders are betting that the Federal Reserve will implement at least one aggressive rate cut of up to 50 basis points in the remaining three FOMC monetary policy meetings this year, and they are even betting that the scale of rate cuts this year will be the same as in 2024, betting on a 100 basis point cut.

Traders expect that Federal Reserve policymakers will initiate the first rate cut since 2025 this week. Although expectations for a 50 basis point cut in September have warmed in recent trading days, a 25 basis point cut is seen as the most likely decision.

As signs of a weakening U.S. labor market become more apparent, some traders are beginning to hedge risks. Despite persistent inflation, the potentially deteriorating economic outlook is still prompting the market to price in a more significant rate cut path from the Federal Reserve for the remainder of the year.

Overall, traders are guarding against the possibility of a dovish rate cut surprise—similar to last year when the Federal Reserve announced a 50 basis point cut in September 2024 following unexpectedly weak non-farm payrolls. Some traders still insist that the Federal Reserve is "behind the curve" and will initiate a "catch-up" 50 basis point cut this week, while a small number of traders expect the White House to pressure the Federal Reserve into a 50 basis point cut.

This week, trading flows related to the Secured Overnight Financing Rate (SOFR)—which is highly sensitive to Federal Reserve monetary policy expectations—show an increase in demand for dovish options for December, which will expire two days after the Federal Reserve's monetary policy announcement on December 10.

These SOFR options positions are expected to benefit from up to two half-percentage point rate cuts or from three separate 25 basis point cuts in the September, October, and December meetings. In contrast, the swap market currently appears less dovish, indicating about 70 basis points of monetary policy easing expected by the end of the December FOMC meeting, betting that the Federal Reserve is likely to cut rates by 25 basis points in each of the remaining three meetings for a total of 75 basis points, but it has not priced in nearly 100% for three rate cuts this year like the SOFR options market.

The rate cuts by the Federal Reserve accounted for this year—swap market shows about 70 basis points of easing expected by the December FOMC.

Of course, for traders betting on larger rate cuts, the risk is that Federal Reserve Chairman Jerome Powell may signal a more cautious monetary policy path on Wednesday afternoon Eastern Time, and the ultimate impact of tariff policies on consumer prices remains unclear Economists at Standard Chartered Bank wrote in a report that, given the continued weakness in non-farm employment growth, they expect the Federal Reserve to implement a "catch-up" rate cut of 50 basis points this week. However, they noted that "Powell is unlikely to provide clear guidance on further easing," and officials may have differing views on subsequent monetary policy measures.

The interest rate futures market also showed signs of traders hedging against a dovish surprise this week. On Monday, there was the largest block trade in the history of the federal funds futures market, totaling 84,000 contracts, indicating strong hedging demand from traders for a half-point rate cut announcement this week. This futures contract has been an important tool for guiding the Federal Reserve's overnight benchmark interest rate path since it was listed on the Chicago Mercantile Exchange in 1988.

Traders increasing their dovish bets are likely also considering policy pressure from the White House. President Donald Trump has repeatedly criticized Powell for being too slow to cut rates, and at this meeting, his economic policy advisor, Stephen Miran, who was recently confirmed as a Federal Reserve governor, will participate in the FOMC monetary policy decision.

In August, the U.S. non-farm payrolls increased by only 22,000, while the median economist estimate was 75,000. The unemployment rate in August rose to 4.3%, the highest since 2021, consistent with the median economist estimate. Additionally, the already weak non-farm payroll numbers for June and July were revised down by a total of 21,000, with June's employment data revised to negative growth—marking the first monthly decline in employment numbers since 2020. This has led some interest rate futures traders to leave room for a larger half-point rate cut forecast, while now expecting more easing measures from the Federal Reserve by the end of 2025—betting on three consecutive rate cuts by the Fed before the end of the year.

Therefore, following the extremely weak non-farm data release, some market views suggest that the Federal Reserve's FOMC monetary policy decisions should no longer be viewed from the perspective of preemptive rate cuts, but rather as monetary policy being "slightly behind" the actual economic situation. Thus, driven by continued weakness in employment and increasing political pressure, the extent of the Federal Reserve's rate cut in September and the subsequent dovish signals released may exceed general expectations.

Here is the latest position indicator overview for the interest rate market:

JP Morgan U.S. Treasury Client Survey

As of the week ending September 15, the U.S. Treasury client survey by Wall Street financial giant JP Morgan showed that overall short positions decreased by 2 percentage points, shifting to neutral, while long positions remained unchanged. The weekly change raised the net long positions of all clients to the highest level since August 25, highlighting that as expectations for Federal Reserve rate cuts heat up, bullish sentiment in the Treasury market is also increasing.

Most Active SOFR Options

In the SOFR options with expirations in December 2025, March 2026, and June 2026, a large number of new positions were established around the 96.50 strike price over the past week, due to active trading of call and put options for December 25 (Dec25) and put options for June 26 (Jun26) Recently, multiple call condor strategies have emerged around the strike price in Dec25 options, aiming to bet on a 25 basis point rate cut at each of the remaining three Federal Reserve meetings this year. At the same time, there is considerable buying interest in the SFRZ5 96.50/96.375/96.25 put tree and the SFRZ5 96.50/96.625 call spread. There has also been direct buying of the Dec25 call option at the 96.50 strike price.

The most active SOFR option strike prices—net changes in the top five and bottom five SOFR option strike prices over the past week.

The above chart shows that the positions and transactions of SOFR options this week are highly centered around the 96.50 strike price (especially Dec25), indicating that interest rate traders have a dovish baseline expectation: a total of about 75bp rate cut path over the three meetings this year is the main scenario, while using structured strategies to bet on a "corridor" around 96.50 and hedge at both ends (to guard against a one-time 50bp large cut or subsequent hawkish/dovish tail risks).

Overall, traders are focusing on 96.50: that is, increasing bets on the pace of Federal Reserve rate cuts, but not betting on extremes; through call condor (bullish vulture)/spreads, locking in the most likely path of 25bp cuts sequentially this year while retaining hedges against a one-time 50bp cut or a subsequent hawkish turn.

SOFR Options Heatmap

In trading across Dec25, Mar26, and Jun26 maturities, the 96.50 strike price is the most concentrated, with active trading over the past week. Most of the concentration at this strike price is in Dec25 call options, seemingly targeting an extremely dovish scenario where a half percentage point aggressive cut may occur in the remaining meetings this year. The 95.625 strike price is also highly concentrated, as there are a large number of open positions in Dec25 put options at that level.

Overall, the above SOFR options heatmap indicates that market traders primarily expect three moderate 25bp cuts this year, with a controllable range (with 96.50 as the "sweet spot"), but traders have hedged at both ends: one end against a "half-point sudden drop," and the other end against "sticky inflation leading to fewer cuts." The baseline expectation in the SOFR options market is a path of three cuts of 25bp each (≈70–75bp), while hedging against a possible 50bp cut or fewer cuts/rate hikes thereafter.

U.S. Treasury Options Skew

The skew of U.S. Treasury options remains close to neutral across the entire curve, with the long end recently shifting from a previous dominance of put option premiums to neutrality. Recently, in the flow of U.S. Treasury options, there was a notable sale of a nominal $27 million strangle, implemented through December options

CFTC Futures Positions

As of the week ending September 9, traditional asset management institutions have shifted to a bullish stance on the long end of the U.S. Treasury yield curve, increasing their net long positions in long-term and ultra-long-term U.S. Treasury futures. In contrast, hedge funds have increased their net short positions in 2-year to 10-year U.S. Treasury futures.