This is the intimidation of the "shadow Fed chairman"! The market is betting real money on a more aggressive interest rate cut in 2026.

Interest rate futures traders around the world are placing big bets on the new Chairman of the Federal Reserve, who will take office next May, as well as the delayed release of various economic data this month, in support of US President Donald Trump's calls for a significant interest rate cut. Over the past few days, as Kevin Hassett, Director of the White House National Economic Council, rapidly became the frontrunner to succeed Powell as head of the Federal Reserve, the market began to build up positions betting that this extremely dovish "shadow Federal Reserve Chairman" would have a greater influence on the Federal Reserve's monetary policy stance, and thus betting that the Federal Reserve will implement more interest rate cuts in 2026. In the US interest rate futures market, the demand for a short-end interest rate curve structure linked to the Secured Overnight Financing Rate (SOFR) is rising, as this rate is highly correlated with market expectations for Federal Reserve interest rate decisions. These bets reflect a possibility that after the current Federal Reserve Chairman Jerome Powell's term ends in May, the pace of Federal Reserve monetary policy easing will further accelerate. The monetary policy statement on June 17 will be the first statement issued under the new central bank leader. Since Kevin Hassett, Director of the White House National Economic Council, became the frontrunner to succeed Powell, new positions on the Federal Reserve's rate cut process have begun to accumulate. Trump said on Tuesday at a cabinet meeting that the contest is "down to the final round," and when mentioning Hassett, he referred to him as a "potential Federal Reserve Chairman." He stated that he will announce his nomination for Federal Reserve Chairman early next year. "This announcement will create an extremely influential 'shadow Federal Reserve Chairman,'" wrote Kristina Hooper, Chief Market Strategist at Man Group, in a report this week. "This may make the Federal Reserve face an immeasurable complexity in delivering monetary policy and may confuse the market at a time when clear guidance is needed." In the leverage futures market, traders have already laid out positions in advance for various scenarios. On Monday, a large buyer appeared in a specific structure of SOFR futures "fly" with the most significant transaction in over a year. In recent trading days, trading in the 3-month, 6-month, and 12-month SOFR spreads has been very active, highlighting traders' attempts to bet on a larger interest rate cut policy in 2026. The latest pricing in the interest rate futures market shows that traders are currently betting that there is over a 90% probability of a 25 basis point interest rate cut at the December Federal Reserve meeting; the market pricing also expects an easing of 85 to 100 basis points by the end of next year, equivalent to pricing in four 25 basis point interest rate cuts. Delayed important economic data In the futures spread trading, what drives the market is not only the announcement of the next Federal Reserve Chairman. Strategists at Wall Street financial giant Goldman Sachs are seeking hedging opportunities ahead of the November non-farm employment data release, which was initially scheduled to be released on December 16, just after the December Federal Reserve monetary policy meeting and before the January meeting next year. Due to the previous long government shutdown, the data had been delayed. If the data confirms recent signs of weakness, it will further push the market towards dovish bets. "Given the trend in the 'slack' indicator of the labor market, we still believe that the front-end rate pricing reflects a greater asymmetry based on the expectation of rate cuts," strategists including George Cole stated in a report on November 28. They prefer to hedge using the SOFR 2026 December/2027 December spread, as well as longer-term "condition 2-year-10-year bull steepeners" to bet on a steeper yield curve for US Treasury bonds. They emphasize that such positions, if Hassett is confirmed as the next Federal Reserve chairman, will receive further support. Bets on a shift to a dovish Federal Reserve policy and the rising probability of a rate cut in December have pushed the 10-year Treasury yield below 4% last week. US Treasury bonds edged up slightly at the end of the day on Tuesday, rebounding from an earlier decline when the 10-year Treasury yield briefly rose to 4.11%, the highest level in nearly two weeks. Jack McIntyre, Portfolio Manager at Brandywine Global Investment Management, stated that even with short-end US Treasury yields declining while inflation remains above the Federal Reserve's target, a rate cut could push long-term Treasury yields significantly higher. "If Hassett is confirmed, the most likely outcome for the market is bear steepening," McIntyre said. "I consider myself a key player in the 'bond market vigilantes.' My job is to signal to the government. Do we need to send this signal now? It's too early to draw conclusions. For me, it's still mainly about watching." Here is a summary of the latest position curve indicators related to interest rate markets: JPMorgan survey In the week ending December 1, investors' long positions fell by 9 percentage points, while short positions rose by 3 percentage points. As a result, net long positions fell to their lowest level since November 3. The following chart shows JPMorgan's survey of overall client US Treasury positions, indicating that investors' net long positions are at their lowest level in a month. SOFR option new risk exposure In SOFR options due to expire in June 2026, recent fund flow activities have been mainly centered around the 96.3125 strike price, including buying SFRZ5 96.25/96.3125 bullish spread options, SFRZ5 96.3125/96.375 bullish spread options, and other new risk exposures. The fund flows also include buying SFRZ5 96.3125/96.375 2x1 bear spread options, as traders are positioning themselves before the monetary policy meeting on December 10. The market currently implies a rate cut of approximately 22 basis points at this meeting, a sharp increase from less than 40% to around 90% in the implied probability of the rate cut. Most active SOFR option strikes - SOFR option strikes with the most recent net change in the past week The latest options structure for SOFR indicates that a 25bp rate cut on December 10 has become the "default scenario." The most active option strikes for SOFR options are concentrated in the 96.25-96.3125 range, equivalent to 3.75% to 3.6875%. Traders have accumulated a large number of bullish spreads and ratio put spreads around 96.3125: betting on a "faster, deeper rate cut path" on the upside, and guarding against "unexpected inaction or even a more hawkish stance" on the downside. In other words, the market consensus is that a rate cut is inevitable, but the real uncertainty lies in whether the new "Trump-era Federal Reserve" will accelerate this rate cut path. Overall skew slightly tilts towards calls with higher strike prices (96.3125, 96.4375) for a "more dovish Federal Reserve under the Trump era," as there has been a significant increase in outstanding open calls, while puts with lower strike prices (96.0625, 96.125) were significantly closed out. This indicates that the market is shifting the probability from "the tail risk of higher rates" to "further rate cuts and a more dovish Federal Reserve under political pressure and weakening labor conditions." In all SOFR options extending to the June 2026 contract, the 96.25 strike remains the largest in open interest, as the demand remains strong for December 2025 (Dec25) upside call structures involving this level. There are also a significant number of open contracts on the 96.50 and 96.375 call options for December 2025. For large bearish structures, the open positions for put options with strikes at 96.25 and 96.1875 in December 2025 are highly concentrated. These pricing trends in SOFR options imply that from late 2025 to mid-2026, the SOFR pricing market is using a large number of call options to bet on "a more aggressive rate cut than currently expected," while using a stack of put options in the 3.75-3.81% range to hedge against "rate cuts falling short of expectations or even shifting back to a hawkish stance." In other words, the options market is prepaying for a slightly steeper rate cut path under the new and extremely dovish Trump administration era at the Federal Reserve, but is heavily hedging the risk of "rate cuts falling short of expectations or returning to a more hawkish stance" at the 96.25-96.1875 put strike prices - indicating that while a rate cut is the consensus, there is significant divergence in the intensity and endpoint of the rate cut, with a slightly stronger bias towards aggressive dovish bets based on current pricing. Open interest in SOFR options - Top ten option strikes with the highest concentration for December 2025, March 2026, and June 2026 tenors In the past week, overall, the premium paid for options used to hedge US Treasuries remained neutral, hovering around neutral levels. In the front-end and mid-curve regions of the futures sequence, the premium slightly favors call options over put options, indicating that traders are more willing to pay a premium to hedge against the risk of rising US Treasury prices in the front-end and mid-curve areas, rather than hedging against price declines (corresponding to yield increases).