Options traders protect against a slower Federal Reserve rate hike path

Options traders are protecting themselves against the possibility that the Federal Reserve will raise interest rates less than current market expectations. Interest-rate swaps now point to three quarter-point rate rises by next June. This expectation grew after central bank policymakers voted to raise their lending benchmark by a quarter point and signaled more increases to control inflation. In response, some traders are hedging their bets using options linked to the Secured Overnight Financing Rate. Demand has grown over the past week for calls tied to March SOFR futures, which shows a rising appetite for protection against a less aggressive Federal Reserve. Christian Hoffmann, head of fixed income at Thornburg Investment Management, stated that four hikes over a year is a dramatic response to economic conditions and would cause macro economic effects. Oil remains a key factor influencing the Federal Reserve path, with rising crude prices linked to the Iran war helping push US long-term yields past five percent. On Tuesday, Treasuries moved alongside oil as Saudi Arabia planned to resume flows on a vital pipeline. Meanwhile, investors focused on the United Nations gathering in New York for updates on the Strait of Hormuz. George Bory, chief investment strategist of fixed income at Allspring Global Investments, increased his bullish positions in the bond market. A recent JPMorgan Chase and Company investor survey showed an increase in outright long positions to the highest level since last November. Bory noted that higher yields, monetary policy, and oil prices act as a tax on growth. Factors like a slowing economy, easing Middle East tensions, and lower spending on artificial intelligence could lead to fewer Federal Reserve hikes. By Monday's close, open interest in March 2027 SOFR calls reached about 2.7 million, exceeding puts in the same tenor by roughly 1 million. One standout position in March 2027 SOFR options aimed at an overnight rate near three percent, which is well below the 3.88 percent fed effective rate.