Swaps are now pricing more than a 50% chance of a US Federal Reserve rate rise by next April, even as the retail-facing CME FedWatch tool put the odds of a pre-cut 2026 hike at roughly 10%. Markets repriced after the Fed on April 29 left its target range at 3.50% to 3.75% and Chair Jerome Powell warned inflation could "go much higher" the longer the Iran conflict lasts. The repricing showed up across bonds and derivatives: large SOFR option purchases, weakness in June 2027 SOFR futures, and the March 2028 swap trading eight basis points below the current Fed effective rate. Traders say they're positioning ahead of Friday's US employment report and a Senate calendar that includes action on Kevin Warsh's nomination, dates market participants say could alter the odds again.
Markets moved quickly after the Fed's April 29 decision to hold the policy rate at 3.50%-3.75% and Chair Jerome Powell's stark comment about the risk of higher prices if the Iran conflict persists. CME FedWatch data showed the short-term, retail-facing probability of at least one hike in 2026 climb to roughly 10% shortly after Powell's press conference, up from essentially zero the day before. That jump reflected an immediate market repricing of near-term policy risk.
Swaps and SOFR markets push pricing forward
Behind the headline FedWatch move, swaps and secured overnight financing rate markets took a more aggressive view. Swaps linked to Fed policy are signaling greater-than-50% odds of a rate increase by next April, a materially different timing than the CME retail measure. Market pricing for March 2028 Fed swaps has also shifted, with that contract trading eight basis points below the current Fed effective rate, effectively pushing lower-rate expectations out into early 2028.
Options and futures flows reinforced the story of active hedging. Large purchases in SOFR options accompanied a pronounced underperformance in June 2027 SOFR futures contracts, and dealers reported an aggressive widening of the June 2026-2027-2028 butterfly to cycle highs. Those moves are consistent with bond traders and portfolio managers increasing hedge positions to guard against the chance that policy tightens before it eases.
Market strategists offered mechanics for the repricing. JPMorgan strategists pointed to a short-term indicator of bond yield expectations turning positive for the first time since 2022. DataTrek noted the five-year breakeven inflation rate climbed to 2.69%, its highest since 2023, suggesting markets are taking commodity-driven inflation risk more seriously.
Analysts, traders and the politics of policy
Research houses also weighed in on the likely policy path. Macquarie Research said its baseline remains that the next Fed move will be a hike, citing labour-market improvement as a key reason.
Evercore ISI economists wrote that a stabilising US jobs market would give the Fed scope to police an inflation shock from oil, a specific worry after Powell's comments.
Individual market participants described the pricing as notable. LPL Financial strategist Lawrence Gillum told reporters the longer the Iran war goes on, the less likely cuts this year look. Wellington Management's Brij Khurana called it "striking" that the front end of the US curve hasn't fully priced a potential hiking cycle, highlighting the tension between different market measures.
There is, however, a clear divergence in how quickly traders expect a turn in policy. The retail-facing CME FedWatch spike to around 10% for a 2026 hike sits alongside swaps markets that imply a more immediate chance of tightening by next April. That gap matters because it changes how investors hedge across cash, swaps and futures, and it means some parts of the market are already positioned for a tightening cycle while others are not.
One prediction-market data set reported in CryptoBriefing offered a sharp near-term political signal, though it's single-source. CryptoBriefing noted a May 15 contract on Kevin Warsh's confirmation at 94% YES and a May 1 contract at 1.7% YES. The outlet also described the market for a 4.25% federal funds rate by year-end as lacking clear pricing, a view not corroborated elsewhere in reporting.
Related Articles
- LATAM lifts 2025 EBITDAR to $4.0bn despite 11.6% cost rise
- Cut Quarterly Reports to Two? SEC Plan Sparks Debate
- Musk to pay $1.5m over late 2022 Twitter disclosure
Friday's US jobs release and the May 15 vote on Kevin Warsh are the next clear catalysts, and traders say those events could reprice the odds of a Fed hike before cuts and force some managers to rebalance hedges.
This article was created with AI assistance.
