Options Market Bets Fed Rate Hike Pace Is Overpriced as SOFR Trading Volume Doubles
N.R. Finch
The day after the Fed's June decision, SOFR options volume doubled as new positions bet on a gentler rate path than markets currently price — some traders believe the hawkish reaction to Chair Warsh has gone too far.
Why did SOFR options volume suddenly double?
After the Fed's June rate decision, trading volume in SOFR (Secured Overnight Financing Rate — a benchmark that tracks Fed policy expectations) options doubled the next day.
The direction of new positions was clear: betting the Fed will hike less than the money market currently prices.
This means → a cohort of traders is putting real money behind one view — the market's reaction to Chair Kevin Warsh's hawkish signal has overshot.
How did hawkish expectations ratchet up this far?
Since the late-February US-Israel joint military operation, rising oil prices stoked inflation fears, pushed Treasury yields higher, and led traders to pile into Fed-hike bets.
Last week Warsh explicitly committed to price stability — even as President Trump publicly pressed for rate cuts — reinforcing the hawkish consensus.
In plain terms = war → oil spike → inflation worry → rate-hike bets, plus the Fed chair himself talking tough. Markets kept marking the hiking path higher.
Why do some say this pricing has gone too far?
TD Securities rates strategist Molly Brooks said the rate-swap-implied expectation of a July hike is "mispriced," even though the broader direction of hikes this year is reasonable.
Her logic: even the most hawkish Fed officials may wait for more labor-market and inflation data before acting.
This means → the market conflated "hikes will come this year" with "hikes start immediately" — the pace is overpriced; the direction may not be wrong.
What exactly are options positions betting on?
New risk is concentrated in December 2026 and March 2027 call options, all pointing to a policy path more accommodative than current pricing.
The 96.50 strike is the densest position — open interest in September and December calls has piled up there and rose further over the past week.
In plain terms = call options at these strikes profit if rates end up lower than expected — buyers think the Fed won't hike as aggressively as priced.
Is the Treasury market also positioning for a rally?
On Monday and Tuesday, traders spent nearly $30 million on August call options, targeting a drop in the 10-year yield from roughly 4.5% to 4.4% or below.
JPMorgan's client survey showed longs and shorts both fell 2 percentage points, while neutral positions rose to their highest in about two months.
This reflects a similar lack of directional conviction in the cash market — JPMorgan strategist Jay Barry noted that after the FOMC meeting, clients "had room to turn more bearish but did not actually do so."
What will settle this debate?
The SOFR options surge and the JPMorgan survey point to the same question: has the market's rate-hike pricing run ahead of actual policy timing?
The answer won't come from positioning — it will come from upcoming inflation and employment data.
In plain terms = two camps are making opposite bets — one says "the Fed hikes soon," the other says "you're jumping the gun." The data will decide who is right.
Content is for reference only, not financial advice.