Bond Traders Abandon Fed-Hike Bets as Soft Inflation Data Shifts Market Outlook

Traders of interest-rate options and swaps rapidly exited positions that had been built on expectations of at least one Federal Reserve rate hike this year. After the Consumer Price Index and Producer Price Index both posted “well-below-consensus” numbers, the market for Secured Overnight Financing Rate (SOFR) put options turned sharply to selling, especially for contracts expiring in September and December. Interest-rate swaps now price only four basis points of tightening for the July 29 policy meeting—about 16 % of a quarter-point hike—down from roughly 40 % earlier in the week. December-contract pricing fell from 43 to 29 basis points, reflecting the revised view that the Fed may deliver only one hike, or none, before mid-2027.

BloombergSoft Inflation Data Crashes Odds of Fed Rate Hike

The back-to-back releases on Tuesday and Wednesday showed a greater slowdown in consumer and producer prices than economists had forecast. The softer data suggest that the aggressive rate-raising campaign of the past year is already dampening price pressures, giving the Fed more latitude to pause while the labor market stays resilient. Prior market expectations of two quarter-point hikes by mid-2027, with at least one this year, have been replaced by a “maybe one, maybe none” outlook.

Soft Inflation Data Crashes Odds of Fed Rate Hike

Federal Reserve Bank of Dallas President Lorie Logan called for “modestly higher interest rates,” noting that inflation does not appear to be heading sustainably back to the 2 % target. Fed officials continued to stress readiness to act against inflation, even as energy prices rose.

Bloomberg

• “I think this is a function of the market coming around to the fact that hikes are not a foregone conclusion,” — Christopher Hodge, chief US economist, Natixis

Bloomberg

• “Two straight well-below-consensus prints and a rosier inflation outlook means that the current policy may be sufficiently restrictive.” — Christopher Hodge, Natixis

Bloomberg

• “hikes are not a foregone conclusion.” — Christopher Hodge, Natixis

Soft Inflation Data Crashes Odds of Fed Rate Hike

• “modestly higher interest rates,” — Lorie Logan, President, Federal Reserve Bank of Dallas

Bloomberg

Treasury yields have been pressured by rising oil prices, which climbed after the collapse of a U.S.–Iran ceasefire and a series of U.S. strikes in the Strait of Hormuz. The oil rally offsets some of the yield-lowering effect of the benign inflation data, keeping the bond market’s outlook nuanced amid both economic and geopolitical uncertainty.

Bloomberg