Bond traders are hedging the risk that the Federal Reserve pivots to cutting rates in 2027, even as long-dated Treasury yields climb to multiyear highs. Options market activity has shifted toward positions that would benefit from a reversal in Fed policy, with buyers targeting September trades for the Fed to hold rates and call options expiring in March and June 2027. Interest rate swaps currently price in nine basis points of a quarter-point hike at the September 16 meeting and about 40 basis points of tightening by June next year. The dovish wagers follow data showing inflation and consumer demand eased in July, with nonfarm payrolls unexpectedly losing 23,000 jobs and retail sales falling the most in over a year. Jeff Schuh, head of the interest rates desk at Constitution Capital, noted that September rate hike odds were halved from as high as 68% two weeks ago, and recent positions betting on a hike are being liquidated.
JPMorgan Chase & CoHedging for Fed rate cuts in 2027 implies lower future yields, pressuring current long-dated Treasury yields.
