Worsening inflation concerns due to escalating war, bond traders reduce bets on interest rate cuts.

With concerns that the war with Iran could trigger inflation, futures market traders are significantly lowering their expectations for a rate cut by the Federal Reserve. This view is reflected in the narrowing of interest rate futures spreads. Traders are betting that the surge in oil prices driven by the war could exacerbate inflation, making it more difficult for policymakers to lower borrowing costs this year. In the United States, the spread between the December 2026 and December 2027 contracts tracking overnight funding rates fell to negative 15 basis points on Tuesday, setting a new low for the current cycle. This spread turned negative last week. Just a few weeks ago, investors were focused on the deflationary impact of artificial intelligence and a cooling job market, with the market already factoring in multiple rate cuts by the Federal Reserve this year.