The Warsh Era Begins: Bond Options Market Shows Growing Divergence on Fed Rate Path
Claire Weston
New Fed Chair Kevin Warsh hosts his first FOMC meeting with options bets spanning multiple hikes this year to cuts by mid-2025 — the market has almost no consensus on the near-term rate path.
What exactly is the market arguing about?
Swaps price this meeting's hold as near-certain, but everything after is split: some bets target multiple hikes this year, others target easing as late as H1 next year.
This means → traders have no read on Warsh's policy lean; pricing covers the full hawk-to-dove spectrum.
BofA rates strategy head Mark Cabana calls Warsh "a relatively unfamiliar face" and says current pricing "nicely reflects the diversity of views in the market."
Where is the money flowing in options?
SOFR-linked options — the most policy-sensitive short-rate contracts — traded ~50% above normal volume last week, with no dominant direction.
Friday's new positions pushed the expected first hike deeper into next year; swaps now price the first full 25 bp hike at the January meeting.
In plain terms = most money hasn't abandoned the "easing eventually" thesis — it's just pushing the timeline further out.
Constitution Capital rates desk head Jeff Schuh: "The message isn't that the market gave up on cuts — it's that easing expectations got pushed further down the time axis."
How does the US-Iran peace deal change the rates picture?
The US and Iran are set to sign an interim peace agreement in Switzerland; oil fell to a three-month low, offering some cushion on the inflation outlook.
This means → lower oil weakens the "inflation rebound → must hike" logic, pressuring some hawkish bets.
Traders positioned actively around the deal's potential impact, but with no unified direction — some added dovish bets, others argued geopolitical calm supports growth and thus hikes.
How are Wall Street houses positioned?
PGIM: three hikes this year. Citi economist Andrew Hollenhorst: still expects cuts this year. BNP Paribas: three hikes starting December.
This reflects the same dispersion as the options market — no consensus scenario.
BofA strategists Meghan Swiber and Eleanor Xiao's base case: "Warsh's messaging will come in more hawkish than the market expects."
What does positioning structure reveal?
The SOFR 96.50 strike remains the highest-concentration position, with large open interest in September and December calls stacked there.
Long-bond option skew leans clearly bearish — traders are paying up to hedge higher long-end yields; front-end and belly skew are near neutral.
JPMorgan's Treasury client survey shows longs cut 3 percentage points to neutral in the week to June 15; net longs fell to roughly a one-month low.
In plain terms = the long end is buying insurance for "higher for longer," while the front end waits; overall positioning is light, meaning any surprise from Warsh triggers an outsized move.
What to watch next?
Warsh's first press-conference language is the key test for whether this disagreement converges or widens.
RBC strategist Izaac Brook notes positioning is "quite light, slightly short-biased" — a dovish signal from Warsh would trigger short-covering that amplifies a bond rally.
This means → hawk or dove, light positioning + high disagreement = volatility almost certainly spikes post-conference.
Content is for reference only, not financial advice.