Is the Woosh nomination effect cooling down? Traders bet that the Federal Reserve will only cut interest rates two to three times this year

The Tong Financial APP notes that short-term interest rate traders are increasingly reaching a consensus bet: if the Federal Reserve cuts interest rates only two to three times this year, this bet will pay off.

Since President Donald Trump’s nomination of Kevin Woorh as Federal Reserve Chair earlier this month, traders have been heavily buying positions betting on a dovish shift in Fed policy. However, ahead of the highly anticipated employment data release on Wednesday, current bets have become somewhat conservative.

Options flows linked to the secured overnight financing rate (SOFR) indicate strong demand for so-called “hawkish” options. SOFR closely tracks expectations of the central bank’s policy rate path, and these options are targeting one of two scenarios: the Fed cutting rates twice or three times by 2026, each by 25 basis points.

Meanwhile, in recent weeks, the interest rate drop options market has also seen similar volatility hedging tools. Barclays strategists noted that following Woorh’s nomination, interest rate volatility increased, and investors favored long-term bond positions.

Strategists Amrut Nashikkar, Eveline Dong, and Charley Chau stated in a report: “Investors are seeking bullish duration exposure to hedge against a more dovish Fed, but do not expect large rate cuts.” They pointed out that investors’ “target is no more than two to three additional rate cuts.”

Active trading in near-term options has been evident ahead of the key January employment report. The data is expected to reveal a weakening or stagnating U.S. labor market, which could alter policy expectations.

The swap market currently prices in about a 30% chance of a third 25 basis point rate cut this year, while the probability of two rate cuts before the September meeting has almost been fully priced in. This has risen from about a 50 basis point cut expected by December a week ago. Weak retail sales data on Tuesday further boosted this dovish shift.

Following the retail data release, U.S. Treasuries rose on Tuesday, with yields falling to their lowest levels in the past month.

Market speculation previously suggested that Woorh, upon succeeding Chair Powell, would follow Trump’s repeated calls for the Fed to cut rates. However, with inflation still stubborn and some Fed policymakers maintaining hawkish stances, Woorh may not pursue aggressive rate cuts. If the Senate confirms Woorh’s nomination, he will assume office promptly and preside over the June policy meeting.

Below is a summary of the latest interest rate market positioning indicators:

JPMorgan Survey

As of the week ending February 9, client net long positions increased by 4 percentage points, and short positions decreased by 5 percentage points. The result is the largest long position since December last year.

SOFR Options

In SOFR options expiring in September 2026, over the past week, demand for call options around the March 2026 expiry has been strong, such as the bullish call spread SFRH696.4375/96.50/96.5625 and SFRH696.375/96.4375/96.50. Additionally, the 96.375 strike has appeared in some put spread structures expiring in June 2026, such as the SFRM696.4375/96.3752x3 put spread. One of the trading highlights over the past week is a structure aimed at achieving up to three rate cuts, with active trading at the 96.75 strike, driven by the large buyers of SFRU696.75/97.00/97.25/97.50 bullish hawkish options and SFRU696.75/96.875/97.125/97.375 bearish hawkish options.

Overall, among options expiring on March 26, June 26, and September 26, the most traded strike remains at 96.50, with large open interest in call options expiring on March 26 and June 26. Demand for the 96.375 strike has surged in recent weeks, with large open interest in both call and put options expiring on March 26, as well as put options expiring on June 26.

SOFR Open Interest

U.S. Treasury Options Premiums

Following three weeks of elevated put option premiums, the risk hedge premiums on the U.S. Treasury yield curve have slightly shifted toward call options. However, since the beginning of this month, this volatility has been minimal, reflecting a market environment of persistently low rates and volatility.