US Treasury Options Shift Focus from Rate Hikes to 2027 Cuts

The Federal Reserve's interest rate path is undergoing a reassessment in the options market. Recent US economic data has weakened, leading investors to hedge against a policy reversal by betting on maintaining interest rates unchanged.

September expiration options saw significant buying, with a focus on March and June 2027 SOFR call options. The probability of a September rate hike dropped from around 68% two weeks ago to about half, according to market data.

This shift in expectations has alleviated some tightening concerns but has not greatly impacted long-term yields, which remain high. The divergence between short-end and long-end expectations creates pressure on growth stocks.