Traders bet on the Federal Reserve making an emergency rate hike within two weeks as market expectations sharply reverse.

According to Bloomberg, in the options market tracking Fed policy, demand for bets linked to the Secured Overnight Financing Rate (SOFR) has already emerged. The logic behind these trades points to the Fed raising rates as soon as within two weeks; if the bond market sharply increases rate-hike expectations before the April 29 policy meeting, these positions will earn outsized returns.

This rapid move to hedge an emergency rate hike signals a sharp reversal in market expectations. Just a month ago, the market still expected the Fed to cut rates as many as three times by year-end, with each cut of 25 basis points. However, since the February 28 flare-up of hostilities, swap market traders have priced in about a 50% probability of rate hikes before December.

As oil prices surge and raise concerns about inflation reigniting, traders have already started unwinding large long positions in U.S. futures.

Jeff Schuh, head of rates trading at Constitution Capital, said that the selling in SOFR futures and the rise across the entire U.S. Treasury yield curve caught large funds off guard. He noted that while the latest bets do not reflect a market baseline scenario, they do indicate that people are becoming increasingly worried that a rapid rise in inflation could put investors who have been going long Treasuries over the past few months at risk.

Schuh describes these types of hedging trades as a low-cost risk management tool, saying that in “90% of cases” it makes the risk of liquidation look more controllable—an inexpensive emergency measure for managing interest rate risk.

At present, the interest-rate swap market is pricing only a 3-basis-point rate hike at the April 29 policy meeting—an implied probability of 12% for a 25-basis-point hike. However, the abnormal activity in the options market highlights investors’ heightened concern about tail risk.

In the current highly uncertain geopolitical environment, traders face unprecedented difficulty when assessing the likely direction of Fed policy. The market not only has to evaluate how the conflict could transmit to inflation, but also has to simultaneously absorb policy variables stemming from an expected transition in Fed leadership.

Kevin Warsh will take over as the next Federal Reserve chair this summer, replacing Jerome Powell, while Trump continues to pressure for lower interest rates. However, against the backdrop of renewed inflation risks, whether the new chair can quickly push for rate cuts remains a major unknown.

Schuh said: “Even if Warsh is about to take the helm at the Fed, uncertainty about the path of interest rates, and how long it will take him to build consensus or garner ‘majority’ support for rate cuts—those are still completely up in the air.”

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责任编辑：宋雅芳