Traders Ramp Up Hedges Against Fed Hiking Less Than Expected
nashnova research
Rate swaps price three more Fed hikes by June, but SOFR options show a surge in bullish bets — traders are building hedges for a shallower tightening path, signaling a meaningful counter-consensus undercurrent beneath the hawkish baseline.
What is the consensus pricing?
Interest-rate swaps currently price three more 25-basis-point hikes before next June.
The Fed reinforced this view last week by raising rates and signaling further tightening.
This means → the dominant narrative is clear: tightening is not over, and rates have further to climb.
Who is betting the other way?
A cohort of traders is using the SOFR — secured overnight financing rate, the key U.S. short-term rate benchmark — options market to buy large volumes of call options hedging a less aggressive hiking path.
Open interest in March 2027 SOFR calls stands at roughly 2.7 million contracts, about 1 million more than equivalent puts.
In plain terms = SOFR calls profit when rates end up lower than the market expects. That kind of skew means serious money doubts the Fed will deliver everything currently priced in.
What does the most extreme position imply?
One notable position targets an overnight rate of roughly 3% — well below the current effective fed-funds rate of 3.88%.
This means → reaching that level would require the Fed to pivot to rapid rate cuts by 2027, a scenario far outside the consensus.
In plain terms = this trade is not betting on "one fewer hike." It is betting on a full reversal — a tail hedge for a cutting cycle.
Why do institutions see downside risk to the hiking path?
Christian Hoffmann, head of fixed income at Thornburg: "The market has three more hikes priced in. I'd take the other side. Four hikes in a year is a pretty aggressive response — it will have real knock-on macro effects."
George Bory, CIO of fixed income at Allspring Global: higher yields, tighter policy, and higher oil prices all act as a tax on growth. He sees an economic slowdown, easing Middle East tensions, and cooling AI spending as potential catalysts for fewer hikes than priced.
Jeff Schuh, head of rates trading at Constitution Capital, is more moderate: "The Fed may have one or two cautious hikes left, but after that the market likely enters a range-bound phase."
What do the option-position details reveal?
Over the past week, the 97.00 strike (+94,262 contracts) and 96.25 strike (+102,713 contracts) on March 2027 SOFR calls saw significant new risk.
The flow came mainly from heavy buying of 96.25/97.00 and 96.75/97.75 2×3 call spreads — an options structure that uses two strike prices to target a specific rate range.
This reflects a nuanced view: traders are not simply betting on a rate collapse. They are using spread structures to lock in a moderate rate-decline corridor.
What are Treasuries and oil prices saying?
JPMorgan's latest Treasury client survey shows net longs rose 4 percentage points to the highest since last November, while shorts fell 6 percentage points.
The put-premium skew on long-bond options — though still favoring puts over calls — has narrowed markedly from weeks ago. Traders are less eager to hedge further rises in long-end yields.
Oil remains the wild card: Iran-conflict-driven price spikes have already pushed long-dated U.S. Treasury yields past 5%. Progress on Saudi pipeline restoration and the reopening of the Strait of Hormuz will continue to drive inflation and policy expectations.
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