Worried that the Middle East war could face the worst outcome, traders hedge against the impact of the Federal Reserve's rate hike within a few weeks.

MaticHoleFiller · 2026-03-29T00:47:05+00:00

Bond traders, worried that escalating tensions with Iran will force the Federal Reserve to raise interest rates, are beginning to hedge risks and bet on potential future rate hikes. Market sentiment has reversed, and rate hikes are still expected before the end of the year, especially as rising oil prices due to the conflict trigger inflation concerns. Investors are adjusting their positions to cope with the uncertain interest rate environment.

MaticHoleFiller

2026-03-29 00:47:05

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Bond traders, fearing further escalation of the conflict in Iran, are seeking to hedge against the worst-case war scenario that could force the Federal Reserve to raise interest rates in the coming weeks.

In the options market tracking Fed policy, there has been a demand for bets based on the Secured Overnight Financing Rate (SOFR), indicating that traders believe the Fed could raise rates as early as two weeks from now. If the bond market significantly ramps up rate hike bets before the monetary policy meeting on April 29, these trades could yield returns.

The warming of hedges against emergency rate hike risks marks a sharp turnaround in the market—just a month ago, investors expected at most three rate cuts of 25 basis points before the end of this year. Since the war erupted on February 28, traders in the swap market have priced the probability of a rate hike before December at around 50%, putting short-term Treasuries at risk of further repricing.

According to Jeff Schuh, head of interest rate trading at Constitution Capital, while the latest bets do not reflect the market’s baseline scenario forecast, they do indicate that investors are increasingly worried that rapidly rising inflation could pose risks to those who have built long positions in U.S. Treasuries over the past few months.

With the war in Iran driving up oil prices, traders caught off guard by the resurgence of inflation have been unwinding large long positions in U.S. Treasury futures. Schuh noted that the sell-off in SOFR futures and the broad rise in U.S. Treasury yield curves caught large funds by surprise. He pointed out that such trades “make the risk of a margin call look skewed to the downside 90% of the time, making it a cheap band-aid for funds seeking to manage interest rate risk.”

Interest rate swaps currently reflect only a 12% probability of a 3 basis point hike at the policy meeting on April 29, or a 0.25 percentage point increase.

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