Bond Market Bets on Fed Easing Cycle Ending Early

Bond market bets on early end to Fed’s easing cycle

Bond traders are now betting that the Federal Reserve’s rate-cutting path over the coming year will be shallower and shorter than previously expected, as part of a broader global market expectation that major central banks will slow or halt monetary easing.

Futures and options trading indicate that, aside from the anticipated 25 basis-point rate cut expected on Wednesday, traders now expect the US central bank to deliver only a total of 50 basis points of rate cuts by 2026, with most of the cuts concentrated in the first half of that year.

Diminished expectations for Fed rate cuts have already started to show in futures tied to the Secured Overnight Financing Rate (SOFR), which closely tracks central bank policy moves. On Tuesday, the negative spread between the December 2025 and December 2026 contracts was at its smallest since June, reflecting traders’ views that the degree of monetary easing by the end of next year has diminished.

In the SOFR options market, recent flows have been heavily skewed toward dovish hedges. However, these positions are still mainly targeting the first half of next year. This positioning signals that traders are hedging against a scenario where the Fed ends its rate-cutting cycle around mid-2025 and then pauses.