(Bloomberg) — Bond traders are boosting wagers that the Federal Reserve’s next policy move could be an interest rate hike rather than a cut.

Swaps linked to central bank rate decisions are currently pricing more than a 50% chance that the Fed raises rates by next April, before easing. A growing chorus of traders is also ramping up positions looking to hedge the prospect of rate-hike odds rising by the end of the year. 

The market shift comes as policymakers appear increasingly divided over the interest-rate outlook, just before Kevin Warsh takes over as Fed Chair following a campaign by US President Donald Trump for lower rates.  

Lawrence Gillum, chief fixed-income strategist at LPL Financial sees chances of a rate cut this year, while still possible, going down the longer the Iran conflict goes on. “No doubt Warsh has a tough road ahead,” he said. 

The wagers, seen in both futures and options linked to the Secured Overnight Financing Rate, which closely tracks policy expectations, are gaining traction ahead of Friday’s US employment report. The data could show conditions in the labor market are stabilizing, allowing inflation risks to take center stage among investor concerns.   

“A stabilizing labor market would allow the Fed to firmly focus on policing the inflation shock from oil for as long as that takes before returning to any consideration of rate cuts,” Evercore ISI senior economist Marco Casiraghi and analyst Gang Lyu wrote in a note, adding that their base case is that the war could delay but not derail the cuts.

In the swaps market, the odds of lower rates have now been pushed out to early 2028 with the March 2028 Fed swap price trading eight basis points below the current Fed effective rate.

The pain in the SOFR futures market can be mostly seen around the June 2027 contracts, which have been massively underperforming over the past couple of weeks as traders have not priced in the potential of interest rate increases until about a year out. This has seen the June 2026-2027-2028 butterfly aggressively widen to cycle-highs. 

“The front end of the US curve has not engaged substantially with the prospect we could see a hiking cycle in the next six to twelve months,” said Brij Khurana, portfolio manager at Wellington Management, adding that it is “striking that the US is still not willing to engage with the idea that there could be a hiking cycle.”

In the SOFR options market, flows hedging the possibility for the rate-hike premium to increase over the course of the year were bought in size on Monday and Tuesday. 

CME data in the futures market released Tuesday appeared to show a mix of both position liquidations and new positions, signaling traders are pushing short positions further into 2027 where the pricing of rate hikes has peaked.

“We still think the bar for hikes is much higher than the bar for keeping rates steady,” LPL’s Gillum said.

In the cash market, there was also a bearish shift over the past week as a survey of JPMorgan clients showed investors adding to short positions, coming out of neutral. The buildup in shorts comes as the yield on the 30-year US government debt is hovering around 5%, after breaching the key level for the first time this year.

Here’s a rundown of the latest positioning indicators across the rates market: 

JPMorgan Treasury Client Survey

In the week up to May 4, investor short positions rose 5 percentage points, shifting out of neutrals with longs unchanged over the week. The all-client survey shows the fewest amount of neutral positions since March 16. 

Across SOFR Jun26, Sep26 and Dec26 options, there was a large amount of Dec26 96.625 put options added over the past week with demand seen for the SFRZ6 97.00/96.625 1×2 put spreads. Demand for put strikes was also seen over the past week via SOFR Dec26 96.50/96.375/96.3125/96.1875 put condors which were popular, being bought between 4.5 and 4.75.

The 96.50 strike remains the biggest populated position across Jun26, Sep26 and Dec26 options, followed by the 96.75 where a large amount of Jun26 and Sep26 calls open interest remains. Recent flows have also included buyer of the SFRU6 96.4375/96.5625/96.625/96.75 call condors. There have also been positions added across 96.4375 strikes with recent flows including a buyer of SFRU6 96.4375/96.1875 1×2 put spreads.

The premium paid to hedge options in long-bond futures continues to sharply favor puts, as traders pay up for a move higher in yields across the long-end of the curve, where 30-year yields breached the 5% level on Monday. Last week a couple of larger flows looked to hedge upside however, including a buyer of June calls targeting 10-year yields to drop to 4.15%.

–With assistance from Michael MacKenzie and Ye Xie.

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