Oil price surge impacts rate cut expectations, US Treasury traders increasingly anticipate no Fed rate cut this year.

```

U.S. Treasury options traders are increasingly betting that the Federal Reserve may not cut rates at all this year. The reason is that the ongoing escalation of the Middle East conflict is pushing up oil prices, which could further drive inflation higher.

According to data compiled by the Atlanta Fed, as of Wednesday, traders assign a 25% probability that the Federal Reserve will maintain its current rate range through December. This is up from 17% last Friday, which was the last trading day before the outbreak of war with Iran.

Among all possible scenarios, "no rate cut for the whole year" has become the most probable single outcome. Other scenarios include a 24% chance of one 25-basis-point rate cut, and a 12% chance of two cuts. Meanwhile, traders are even pricing in a 16% probability of a rate hike, up from 8% last Friday. These figures are based on calculations from SOFR futures options, a rate linked to the Federal Reserve's policy rate.

Industry insiders said: "When oil prices surge, you have to consider its impact on inflation. This will push inflation upward, thereby reducing the likelihood of the Fed cutting rates."

Of course, if you add up all the scenarios, the overall probability still leans toward a rate cut. However, the latest pricing changes indicate that, as oil prices have jumped nearly 20% this week, traders’ confidence in the Fed’s ability to actually lower borrowing costs this year has clearly waned. Option flows over the past few days also show that the market is continuously increasing hedges against the risk of the Fed reducing monetary easing or not cutting rates at all.

Another tool used to bet on the Fed’s policy path—the interest rate swap market—also reflects the Fed’s stance becoming less dovish. Traders now expect a total rate cut of about 35 basis points by the end of the year, compared to about 60 basis points at last weekend.

Cooling expectations for rate cuts has triggered recent U.S. Treasuries selloffs, pushing yields to multi-week highs. This is a reversal from the strong rally in Treasuries seen in February, when concerns about the possible impact of AI and cracks in the private credit market drove investors to buy U.S. Treasuries for safety.

Risk Warning and DisclaimerThe market involves risks, and investment needs to be cautious. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable to their particular circumstances. Investing accordingly is at your own risk. ```