Bond traders increase their bets on the possibility that the Federal Reserve may cut interest rates by 0.5 percentage points before the end of the year.

Bond traders are betting on the Federal Reserve to cut interest rates by at least 0.5 percentage points in the final three monetary policy meetings of the year. It is expected that the Fed will announce its first rate cut of the year on Wednesday, most likely a 25 basis point reduction. However, concerns about a cooling labor market have some traders hedging for the risk of more aggressive actions in the coming months, despite persistently high inflation. The growing demand for December options linked to the overnight financing rate suggests that traders are preparing for the Fed's policy announcement on December 10. If the Fed's policy statements in the September, October, and December meetings result in as much as two rate cuts of 0.5 percentage points each, or three cuts of 0.25 percentage points each, these bets are expected to pay off. These trades reflect a more dovish interest rate path than what is currently priced in the forward rate agreements market, which already implies a total of approximately 70 basis points in rate cuts across the three meetings.