Traders are betting that the Federal Reserve may be forced to raise interest rates in the coming weeks.

Golden Finance reported that on March 27, bond traders, fearing that the conflict in Iran could escalate further, are seeking to hedge against the worst-case war outcomes — namely, that the Federal Reserve may be forced to raise interest rates in the coming weeks.
In the options market tracking Federal Reserve policy, demand for bets linked to the Secured Overnight Financing Rate (SOFR) has emerged, corresponding to scenarios of rate hikes occurring as soon as within two weeks. If the bond market significantly raises rate hike expectations before the Federal Reserve’s policy meeting on April 29, these trades will profit.
This surge in hedging demand for emergency rate hikes marks a sharp reversal in market sentiment. Just a month ago, the market anticipated up to three 25 basis point rate cuts by the end of this year. Since the outbreak of war on February 28, swap market traders have begun to price in about a 50% probability of a rate hike before December, which poses further repricing risks for short-term U.S. Treasuries.
Jeff Schuh, head of the rates department at Constitution Capital, stated that while the latest bets do not reflect the market’s baseline scenario, they do indicate growing market concerns: the rapid rise in inflation will pose risks for investors who have been long on U.S. Treasuries in recent months.
Schuh noted that as rising oil prices reignite inflation fears, traders have closed out a large number of long positions in U.S. Treasury futures. The sell-off in SOFR futures and the upward movement of the entire U.S. Treasury yield curve have caught many large funds off guard. He pointed out that for funds seeking to manage interest rate risk, such trades “in 90% of cases make the risk of liquidation appear more manageable and are a cheap stopgap measure.”