(Bloomberg) — Bond traders are ramping up bets on the Federal Reserve cutting interest rates this year, as signs of a weakening US economy bolster the case for the central bank to reduce borrowing costs as demanded by President Donald Trump.
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Positioning in options tied to the Secured Overnight Financing Rate, which closely tracks the expected trajectory of US monetary policy, shows investors readying for the possibility of cuts in each of the three remaining meetings this year, bringing down rates by a total of 75 basis points in 2025. Other plays on SOFR have included bets on a 50 basis-point cut at the central bank’s next meeting, in September.
Last week’s soft payrolls data has made investors more confident that the Fed will cut rates to buffer US growth — a move that Trump has called for but central bank officials have so far resisted. A report on Tuesday showed that the US service sector stagnated in July, further exacerbating those worries.
“The market definitely is on edge after the July payrolls report on Friday, but there is still a lot of data to go before the September meeting,” said Molly Brooks, US rates strategist at TD Securities. “The Fed needs more than just one data indicator and one data point in order to shift its view.”
Swaps currently price in a combined amount of easing equal to about 60 basis points, up from around 30 basis points priced ahead of the payrolls report. Treasury yields have reflected the shift, with the 10-year yield recently at 4.20%, compared to a high of 4.49% last month.
“Against the backdrop of slowing growth, slowing inflation (ex-tariffs), and the Fed moving closer to easing, the direction of travel for yields will be lower over the next several months,” said Dan Carter, portfolio manager at Fort Washington Investment Advisors.
Bullish momentum is also building in the cash market, where traders have jumped into long Treasury positions. The latest survey of clients from JPMorgan Chase & Co shows outright long wagers are at their biggest levels since April.
Meanwhile, Fed members are also showing signs of leaning toward easier monetary policy. San Francisco Federal Reserve Bank President Mary Daly said on Monday that the time is nearing for interest rate cuts, while Federal Reserve Governors Christopher Waller and Michelle Bowman voted against the Fed’s July decision to hold its benchmark rate steady, preferring a quarter-point reduction.
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