Bond traders don’t believe the Federal Reserve’s next move could be a rate hike! They are betting the rate-cut cycle will extend until 2027.

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Traders in the US futures and options markets are ramping up wagers that the Federal Reserve will not only continue cutting rates this year, but that the rate-cutting cycle may extend into next year, instead of hiking rates again in 2027 as previously expected.

The futures spreads linked to the Secured Overnight Financing Rate (SOFR)—a rate closely reflecting the market’s expectation for the Fed’s policy path—are showing a clear inversion. This indicates traders are starting to price in a more prolonged easing cycle.

Until recently, the market was still betting that after two 25 basis point cuts by the Fed before the end of this year, rate hikes would resume in 2027. However, mounting discussions about the impact of artificial intelligence on the labor market have prompted traders to reassess these expectations.

On Tuesday, Federal Reserve Board member Lisa Cook warned that if widespread adoption of AI leads to higher unemployment, the Fed may not be able to fully offset the shocks it causes.

The SOFR options market is also showing similar dovish signals. Related trades are tending toward hedging for the possibility of multiple rate cuts this year, with a notable increase in open interest for certain option contracts—such as the December expiry, strike price 98.00 call options.

Since last weekend, the flattening trend in SOFR spreads has visibly accelerated. Meanwhile, concerns about AI’s “disruptive shock” have weighed on a batch of stocks and boosted US long-term Treasuries.

Jack McIntyre, portfolio manager at Brandywine Global Investment Management, said:

The question is, will AI actually bring inflationary pressure? Perhaps the long end of the yield curve is already starting to reflect this. The only area where AI may cause inflation is in data center construction and the related energy demand, and this is already known to the market.

Risk Warning and DisclaimerThe market involves risk; investment requires caution. This article does not constitute personal investment advice and does not take into account individual users’ specific investment objectives, financial circumstances, or needs. Users should consider whether any opinions, views, or conclusions expressed herein are suitable for their particular situation. Investments based on this are at your own risk. ```