Federal Reserve officials turn hawkish, rate options traders go against the trend: betting on aggressive rate cuts

The Tong Finance APP has learned that data shows U.S. interest rate option traders are increasingly building positions, betting that the Federal Reserve will cut rates more quickly and aggressively than investors currently expect. This bet contrasts sharply with recent signals from some Fed officials, who have suggested the possibility of rate hikes.

On Tuesday, after the long weekend of Presidents’ Day, the U.S. stock market resumed trading. Market data indicates a surge in bullish options on the overnight secured financing rate (SOFR) futures linked to the Fed’s short-term benchmark rate, as well as on U.S. Treasury futures, both of which are expected to profit from market gains.

Todd Colvin, Senior Vice President of Interest Rate Options Sales at Mark IV Brokerage LLC, wrote in a Tuesday client letter that traders “are clearly eager for gains after the long weekend,” with buying dominating.

Driven by the largest weekly increase in the U.S. Treasury market since August, market interest in these trades has surged. Part of the reason is the moderate inflation data released last Friday, which boosted expectations for Fed rate cuts.

However, on Wednesday, U.S. Treasuries declined further, and the latest Federal Reserve policy meeting minutes showed several officials indicating that if inflation remains high, further rate hikes cannot be ruled out. Despite this, the December 2026 SOFR futures contract still reached its highest level since early December on Tuesday.

The options market’s trend contrasts sharply with the spot market. According to a recent JPMorgan survey, by Tuesday, investors had reduced their net long positions in U.S. Treasuries, with more investors adopting a neutral stance.

Alex Manzara, a derivatives broker at RJ O’Brien & Associates, said that Tuesday’s buying of SOFR call options was “very active.” He noted that buying options expiring in the second half of the year makes sense, as President Trump’s nominee for Fed Chair, Kevin Woor, is expected to succeed Jerome Powell.

The most popular call options include approximately 100,000 contracts of SOFR futures expiring in December 2026 and about 50,000 contracts expiring in September 2026, both with strike prices of 98. Among the one-year mid-curve options, which reference futures contracts one year ahead, at least 50,000 calls expiring in September 2026 and December 2026 with a strike of 98 have been bought.

Manzara said, “My personal understanding is that some quite smart people are heavily buying call options because they believe that in the future, there might be an issue that causes the Fed to take more aggressive rate cuts than the market is currently pricing in.”