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Bond Traders Hedge Prospect That This May Be Fed’s Last Hike

  • Fed swaps price in chance of a March pause after 25bp Feb move
  • Traders wade into SOFR options to hedge dovish Fed scenarios
Bloomberg business news
WATCH: Hebe Chen of IG Markets discusses Fed policy and its implications for financial markets, China’s reopening, gold and the US dollar.Source: Bloomberg
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With the Federal Reserve’s Feb. 1 interest-rate decision a week away, traders in the options market are contemplating a scenario in which the rate hike it’s expected to deliver ends up being the last one of the tightening cycle.

Ahead of next week’s policy meeting, activity in options tied to the Secured Overnight Financing Rate has mostly been geared toward hedging against dovish outcomes, as well as outright bets that stand to benefit if investors scale back expectations for additional Fed tightening in coming months. Already, about half a percentage point of rate cuts are priced in for the second half of the year.