Traders taking big bets on the Fed making an "unconventional" 50 basis point rate cut, while SOFR options open interest surges.

Traders are heavily betting that the Federal Reserve will implement an unusually large rate cut before the end of the year. They believe that the Fed's policy may be more aggressive than what other market observers currently expect. Options trading activity linked to the Secured Overnight Financing Rate (SOFR) in recent weeks shows that the market is building up bets - that the Fed may cut rates by 50 basis points later this month or at its December meeting. This exceeds the two expected 25 basis point rate cuts currently priced in the interest rate swap market. Although the U.S. government's weeks-long shutdown has delayed the release of employment data and other key economic indicators, once the shutdown ends, a large amount of information reflecting the latest economic conditions will be released. Some expect that this dense release of data will provide more evidence of economic weakness, supporting further rate cuts. At the same time, options trading activity shows that international trade tensions are escalating again, seemingly further prompting traders to hedge the possibility of a 50 basis point rate cut. In the December-expiry SOFR options, such hedge trades have significantly increased, with open interest (the scale of new risk exposure held by traders) rising sharply. The expiration date for the December SOFR options is two days after the policy statement is released on December 10, making it an ideal tool to bet on the outcomes of the remaining two Fed meetings this year. This week's trading activity has continued the trend from last week. Last week, traders bought a variety of tools to hedge against a "dovish scenario," such as options structures betting on a 50 basis point rate cut. The cash market also shows bullish sentiment. Recent price increases in U.S. government bonds have pushed the yield on the two-year U.S. Treasury bond to a yearly low, approaching 3.5%. Vanguard portfolio manager John Madziyire stated: "Given the current risk balance, a 'slightly long' bias is indeed reasonable." Here is a summary of the latest positioning indicators in the interest rate market: JPMorgan Chase survey In the week ending October 14, a JPMorgan Chase survey of clients showed that the neutral positioning ratio reached its highest level in a month. During the same period, investors' short positions decreased by 4 percentage points, while long positions remained unchanged from the previous week. Most active SOFR options In recent weeks, demand for various call option structures betting on a "steeper Fed rate cut path than currently priced in the swap market" has surged in SOFR options expiring in December 2025, March 2026, and June 2026. Overall trading flow indicates that the market is betting that the Fed may cut rates by 50 basis points in October or December. Recent trading flows in the December 2025 options include: 96.50/96.5625 call option spread, 96.50/96.625 call option spread, and a buy trade of the 96.5625/96.75 call option spread on Monday. SOFR options heatmap The open interest for the 96.50 strike price in SOFR options expiring in December 2025, March 2026, and June 2026 still ranks first, mainly due to the large amount of open interest in the December 2025 call options at this strike price. Recent trading flows include: direct purchase of the 96.50 call option in December 2025 SOFR options (SFRZ5), as well as the purchase of SFRZ5 96.50/96.5625 call option spread and SFRZ5 96.50/96.625 call option spread. U.S. Treasury options skew Data on U.S. Treasury options skew shows that the "call option hedging premium" relative to "put options" for the U.S. 10-year Treasury futures has recently reached its highest level since April. This indicates that traders are more willing to pay a higher premium to hedge against the risk of rising Treasury yields (i.e., falling yields) compared to hedging against the risk of selling Treasury bonds. In the longer-term (long-term Treasury options), after weeks of trending towards "put options," the skew indicator has returned to near neutral levels.