Bets on Outsize Fed Cut Gain Steam as CPI Data Backs Doves
Traders are increasingly betting on a significant Federal Reserve rate cut following a benign US inflation report. Shorter-term Treasury yields fell after July's data, with swaps traders now pricing in a 90% chance of a September rate reduction.
The market has seen notable positioning for a cut exceeding 25 basis points, including a $2 million premium on a SOFR position that WOULD profit from such a move. Treasury Secretary Scott Bessent has publicly suggested the Fed should consider a 50 basis-point reduction.
This dovish shift comes as investors continue piling into rate-sensitive assets. The inflation data provides early validation for those who've been building positions in swaps, options, and Treasury longs in anticipation of looser monetary policy.
