Investors Pile Into Fed Futures as Bets Build for a December Cut

Investor conviction is growing that the Federal Reserve will move ahead with another interest-rate cut when officials gather next month, reversing the skepticism that had taken hold just a week earlier. That shift in sentiment has triggered a powerful rally in US rates markets, with demand for bond-linked derivatives climbing sharply.

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Over the past three trading sessions, traders have piled into futures tied to the Fed’s benchmark rate. The January contract posted record-setting daily volume on back-to-back days last week, underscoring how quickly expectations have flipped. Market pricing now reflects roughly an 80% chance that policymakers will approve a quarter-point cut at the December meeting a dramatic jump from the roughly 30% probability seen only days ago.

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This renewed confidence traces back to last week’s delayed September employment report, which delivered a mixed message about the labor market. Momentum accelerated on Friday when New York Fed President John Williams suggested he sees scope for a rate reduction “in the near term” as hiring cools.

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“The Fed is very divided,” said Tracy Chen, portfolio manager at Brandywine Global Investment Management, adding that, at this point, “doves have outnumbered hawks.”

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The drumbeat continued this week. San Francisco Fed President Mary Daly voiced support for lowering rates at the upcoming meeting, while Governor Stephen Miran reiterated his push for deeper rate cuts despite inflation still sitting above the Fed’s preferred target.

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Fed Chair Jerome Powell and several key members of the rate-setting committee are “on board with a cut,” according to Subadra Rajappa, strategist at Societe Generale. She noted that the latest string of softer data particularly around the labor market strengthens Powell’s ability to bring the rest of the committee along.

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Bond markets are reflecting that dovish shift. JPMorgan’s latest client survey showed net long positions in Treasuries climbing to their highest level in roughly 15 years, signaling growing confidence in lower yields.

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On Tuesday, the 10-year Treasury yield dipped below 4% for the first time in a month. The move came after White House National Economic Council Director Kevin Hassett emerged as the leading candidate to become the next Fed chair, a development that reinforced expectations for continued easing into next year.

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It’s common for Fed officials to steer market expectations in the days leading up to a decision to avoid major surprises. In fact, over the past two-plus years covering 20 separate policy meetings traders have fully priced in the expected outcome all but three times this close to a decision.

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The scale of recent futures positioning highlights how rapidly sentiment has changed. Traders have added close to 275,000 new contracts in January fed funds futures since Thursday. That equates to roughly $11.5 million per basis point of risk, or about 37% of the contract’s total open interest as of Tuesday. The January contract has rallied substantially, climbing from a low of 96.18 on Thursday to as high as 96.35 to start the week a clear sign of aggressive long-side positioning.

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“Markets interpreted Williams’ comments as Powell effectively revealing his hand,” said Blake Gwinn, head of US interest-rate strategy at RBC Capital Markets. “And the data this week has certainly leaned in that direction.”

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Even so, not every Wall Street strategist is convinced the December cut is locked in. Morgan Stanley last week scrapped its earlier forecast calling for a near-term easing. JPMorgan remains skeptical as well, suggesting the Fed may hold steady next month even though the meeting “will be a very close call.”

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“We still expect a cut in December, but the outlook beyond that becomes more uncertain,” Tiffany Wilding, economist at Pacific Investment Management Co., said on Television. “The economy has performed surprisingly well this year, but there are downside risks for employment, and inflation remains near 3% clearly above target.”

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For the week ending Nov. 24, investors increased outright long positions by four percentage points, pushing net longs to their highest level since October 2010. Short positions declined by one point.

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There has been a notable buildup in open interest at the 96.25 strike across SOFR options expiring through June 2026. The shift stems largely from increased positioning in December 2025 calls over the past week.

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Traders have favored structures that hedge around the risk of a 25-basis-point cut at the December FOMC meeting, including SFRZ5 96.125/96.25 and 96.25/96.3125 call spreads. Demand has also strengthened for SFRZ5 96.1875/96.25/96.3125/96.375 call condors. Significant interest remains concentrated in the December 2025 96.50 and 96.375 calls, while put open interest is heaviest in the 96.25 and 96.1875 strikes.

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Pricing for Treasury-hedging options has held near neutral levels over the past week. In the front-end and intermediate maturities, option premiums continue to slightly favor calls over puts a sign that traders are paying more to protect against a bond rally than a selloff. December Treasury options expired on Nov. 21.

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