Options Market Bets Fed Rate Hike Pricing Is Overdone as SOFR Call Activity Heats Up
Alina Collins
What triggered this shift?
Fed Chair Kevin Warsh said at the ECB's Sintra forum that inflation risks have declined recently — the market read this as less hawkish than his June 17 press conference.
This means → the wording was not dovish, but a subtle softening in tone was enough to make traders revisit the hiking path.
A weaker-than-expected June payrolls report had already started the hedging flow last week; this week it intensified.
How much hiking is the swaps market pricing — and why do some think it's too much?
Swaps currently imply roughly 32 basis points of hikes this year — equivalent to one to two 25 bp moves across the four remaining meetings.
Citi strategist Andrew Hollenhorst argues that Fed officials and the market have not repriced hikes as fast as the inflation market has absorbed falling oil prices and other disinflationary signals.
In plain terms = oil has dropped back to pre–Middle East conflict levels, inflation pressure is actually easing, yet the rates market is still quoting as if inflation remains stubbornly high — the two sides are out of sync.
What exactly is the SOFR options market doing?
The marquee trade this week is buying SOFR calls, betting the policy path shifts from hikes to cuts — a sharp contrast with the hawkish positioning that had built up before Sintra.
The 96.50 strike remains the most concentrated, holding heavy open interest in September and December 2026 calls; 96.75 strike call open interest has also risen notably over the past two weeks.
This means → money is building exposure to a "no hikes or even cuts this year" scenario, not merely trimming hawkish bets.
What signal is the Treasury market sending?
On the long end, the 30-year yield has climbed back near 5% and put-protection premiums widened slightly last week — the long end is still pricing sticky inflation.
Short- and belly-of-the-curve option premiums sit near neutral, suggesting the policy-path debate is not concentrated in short-dated bonds.
JPMorgan's client survey shows that in the week to July 6, long positions were cut by 5 percentage points to neutral while shorts held steady — this reflects an overall shift from directional bets toward a wait-and-see stance.
What will it take for this divergence to resolve?
A clear gap has opened between the options market's hedging flow (betting hike pricing is overdone) and the swaps market's implied hikes (still embedding 32 bp).
In plain terms = one market is saying "hikes may not happen," the other is still quoting as if they will — the two are fighting each other.
This divergence will either converge or widen as inflation data and Fed official commentary evolve — and the gap itself is the central pricing puzzle in rates right now.
Warsh's Sintra remarks were read as less hawkish than the June 17 presser, although in absolute terms they were certainly not dovish.
Vail Hartman
Strategist, BMO Capital Markets
(Post-Sintra research note)
Content is for reference only, not financial advice.