Bond traders increase bets on the Fed turning “hawkish”—Will Waller “raise rates” as his first move after taking office?

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The bond market is pricing in a significant shift in the Federal Reserve’s policy path. With Kevin Warsh about to become the new Fed Chair, traders are betting that the central bank’s next move could be a rate hike rather than a cut, and the scale of related positions continues to expand.

According to Bloomberg on Wednesday, interest rate swap contracts linked to the Fed’s rate decisions currently show a probability of over 50% that the Fed will hike rates before cutting them by April next year.

Meanwhile, more traders are ramping up their positions to hedge against the rising risk of a rate hike before the end of the year. This market shift comes at a time when internal differences over the Fed’s rate outlook are deepening, and against the backdrop of Trump pushing for rate cuts, Warsh is set to formally take charge of the Fed.

The shift in market sentiment is putting direct pressure on fixed income assets. Signals of bearishness are also appearing in the cash market—according to a JP Morgan client survey, investors last week continued to increase short positions, moving from a previously neutral stance to a net short one. The yield on the 30-year US Treasury bond is currently hovering around 5%, after breaking through this critical level for the first time this year.

Labor market stabilizes, inflation risk becomes a core concern

These bets are reflected in both the futures and options markets linked to the Secured Overnight Financing Rate (SOFR), and have gained steam ahead of the US jobs report to be released Friday. The market generally expects employment data to show the labor market is stabilizing.

Evercore ISI senior economist Marco Casiraghi and analyst Gang Lyu wrote in a research report: "A stabilizing labor market will allow the Fed to focus its attention on tackling the inflation shock from oil prices, and consider restarting rate cuts once the situation is clarified." They also noted that their baseline scenario is that current geopolitical tensions may delay but will not fundamentally halt the rate-cut process.

LPL Financial Chief Fixed Income Strategist Lawrence Gillum said that while rate cuts are still possible this year, the probability is decreasing as the Iran conflict persists. "No doubt, Warsh faces a tough road ahead," he said.

SOFR futures under pressure, rate hike expectations extend to 2027

In the swaps market, expectations for rate cuts have been pushed back to early 2028; the pricing of the March 2028 Fed funds rate swap contract is 8 basis points below the current effective Fed funds rate.

Pressure in the SOFR futures market is mainly concentrated in the June 2027 contract, which has underperformed markedly in recent weeks because traders did not previously price in the possibility of rate hikes about a year from now. This trend has widened the June 2026-2027-2028 SOFR butterfly spread to its cycle peak.

Wellington Management portfolio manager Brij Khurana said, "The front end of the US yield curve has yet to fully price in the expectation of a rate hike cycle that might occur in the next six to twelve months," and noted, "The US market’s reluctance so far to confront the possibility of a rate hike cycle is quite remarkable."

In the SOFR options market, positions betting on expansion of rate hike premiums before year-end were bought heavily on Monday and Tuesday. CME’s futures market data released Tuesday showed signs of closing out June 2026 SOFR futures, while there was inflow into 10-year Treasury futures, indicating traders are extending short positions into 2027— the peak region for rate hike pricing.

Rate hike threshold remains high, continued market disagreement

Despite increasing bets on rate hikes, some market participants remain cautious about the actual likelihood of a hike. Gillum of LPL Financial said, "We still believe the threshold for a rate hike is much higher than for keeping rates unchanged."

The core dilemma for the market now is: on one hand, the Trump administration continues to pressure for rate cuts, and Warsh’s policy direction after taking office is yet to be seen; on the other hand, inflation pressures and geopolitical risks are prompting traders to price in a more hawkish policy path. This disagreement is expected to become clearer after the jobs data release and once Warsh formally takes office.

Risk Warning and DisclaimerThe market involves risks, and investment should be made cautiously. This article does not constitute individual investment advice and has not taken into account the specific investment goals, financial situations, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their own circumstances. Investments made accordingly are at the investor’s own risk. ```