Fed July Rate Hike Probability Rises to 36% as Futures Short Positions Surge
Miles Bennett
Rate-swap markets now price a 36% chance of a Fed hike in July — up from near zero — while futures short positions have surged roughly 30%, all triggered by new Chair Kevin Warsh's signal that tightening remains on the table.
Where did the 36% hike probability come from?
Rate swaps now embed about 9 basis points of tightening for the July meeting. That translates to roughly a 36% chance of a standard 25-bp hike.
This means → the market has leapt from "almost nobody believes July is live" to "better than one-in-three odds" — a sharp repricing.
The catalyst: new Fed Chair Kevin Warsh explicitly flagged two-way policy risk and shifted the focus to price stability. In plain terms = the new chair told markets the rate-hike card has not been put away.
Who is betting in futures — and which way?
Open interest in the August fed-funds futures contract — which tracks the July 29 policy statement — has climbed from about 454,000 contracts on June 17 to nearly 590,000, a roughly 30% increase in 30 days.
New positions skew toward sellers — traders are shorting the contract. In plain terms = they are betting rates will rise; if a hike materializes, these shorts profit.
Even as some options traders hedge the number of hikes already priced in, the net short build continues to grow. This reflects a widening internal split over the policy path.
Why are long-dated Treasuries attracting buyers instead?
Columbia Threadneedle chief strategist Jason Vaillancourt notes that long-term Treasury yields appear to have peaked in mid-May; even with equity volatility and sideways chop, long-duration bonds have delivered positive returns.
This means → the short end is pricing hike risk while the long end is pricing an eventual slowdown — the two ends of the curve are betting in opposite directions.
J.P. Morgan Asset Management portfolio manager Priya Misra reads the flattening curve — the shrinking gap between short and long yields — as a signal: "The market's risk focus has shifted from the labor market to inflation."
What data could flip this trade?
Labor-market data due as early as this Thursday will serve as the first stress test for these bets. Any sign of softer job growth could pull July hike odds back down and expose existing shorts to losses.
Misra is candid: "If inflation and employment both stay strong, the curve may keep flattening. But I think the inflation peak has passed, so I'm not keen on the flattener here — yet it could well become the pain trade for the market."
Over the next few weeks, the June jobs report and consumer-price report will land in quick succession. For traders holding short positions, any below-expectation print on either could swiftly reverse the current betting logic.
Content is for reference only, not financial advice.