Federal Reserve officials hawkish, interest rate options traders going against the trend to build positions: Betting on aggressive rate cuts.

Data shows that US interest rate options traders are increasingly opening positions, betting that the speed and extent of the Fed's rate cuts will exceed current investor expectations. This betting is in stark contrast to the latest signals from some Fed officials, who have suggested the possibility of raising rates. On Tuesday, after the President's Day long weekend holiday ended, the US stock market resumed trading. Market data shows a significant increase in buying interest for overnight Guaranteed Financing Rate (SOFR) futures call options and US Treasury futures call options linked to the Fed's short-term benchmark interest rate, with these options expected to profit from a rising market. Todd Colvin, Senior Vice President of Interest Rate Options Sales at Mark IV Brokerage LLC, wrote in a client note on Tuesday that traders "clearly came back from the long weekend eager for an up move," with buying dominating the market. Driven by the largest weekly increase in US Treasury market since August, interest in this trade has surged. Part of the reason is mild inflation data released last Friday bolstering expectations of a Fed rate cut. However, on Wednesday, US Treasury yields fell further as the latest Fed policy meeting minutes showed that several officials indicated the possibility of future rate hikes if inflation remains high. Nevertheless, SOFR futures contracts for December 2026 reached their highest level since early December on Tuesday. The trend in the options market contrasts sharply with the spot market. According to a recent survey by JPMorgan Chase, investors reduced their net long positions in US Treasuries in the week ending on Tuesday, with more investors taking a neutral stance. Alex Manzara, a derivatives broker at RJ O'Brien & Associates, noted that buying interest in SOFR call options was "very active" on Tuesday. He pointed out that buying options expiring in the second half of the year makes sense, as it is expected that Kevin Warsh, Trump's nominee for Fed Chair, will replace Jerome Powell by then. The most popular call options include approximately 100,000 contracts of SOFR futures expiring in December 2026 and around 50,000 contracts of SOFR futures expiring in September 2026, with a strike price of 98 for both. At least 50,000 call options with a strike price of 98 for September and December 2026 were bought in the mid-year part of the one-year curve, which references the futures contract one year out. Manzara said, "My personal view is that some pretty smart people are loading up on call options, anticipating a potential issue that could lead the Fed to take more aggressive measures in cutting rates than what the market is currently pricing in."