Bond Traders Bail on Fed Hike Wagers on Softer Inflation Outlook

Two benign US inflation reports have boosted the bond market, prompting interest-rate options traders to scramble to exit positions put on the assumption that the Federal Reserve would deliver at least one increase this year. The shift suggests rates expectations are moving lower as inflation prints reduce the probability of near-term hikes, increasing upside for duration while the options positioning unwinds.

Analysis

Two benign US inflation reports have boosted the bond market, prompting interest-rate options traders to scramble to exit positions put on the assumption that the Federal Reserve would deliver at least one increase this year. The shift suggests rates expectations are moving lower as inflation prints reduce the probability of near-term hikes, increasing upside for duration while the options positioning unwinds.