- Interest futures are slightly under pressure amid a hawkish Fed.
- The higher-for-longer stance has sharply impacted the Eurodollar and SOFR futures as well.
- Longer duration interest futures remain supported amid safe-haven flows.
US interest futures are slightly down on Friday as investors react to the Fed’s hawkish stance and the escalating situation in the Middle East. The global markets are experiencing a fresh dose of caution as the Fed held rates unchanged with a slower-than-expected rate-cut path. The market participants are assessing risk appetite across asset classes.
With the Fed holding benchmark rates at 4.5%, the dot plot shows only two rate cuts by the end of 2025. Moreover, the officials also reaffirmed only one cut in 2026 and one in 2027. It shows that the central bank is still concerned about sticky inflation, especially due to Trump’s trade policy uncertainties.
Investors are now positioning cautiously ahead of the Fed’s monetary policy report due later today, which could provide additional guidance on the Fed’s reaction function. Fed Chair Powell reinforced the dependence on data for the next policy decision. The next rate cut will depend on evident slowing of inflation and a cooling labor market.
The interest future traders have started to unwind earlier aggressive rate-cut bets as Fed Fund Futures now price in only one full cut by the end of 2025, compared to three cuts previously. The 2-year yields have been steady, putting pressure on rate-sensitive assets and boosting implied volatility across fixed-income assets. Eurodollar and SOFR futures have undergone significant repricing. The front end of the curve reflects a higher-for-longer stance and a reduced probability of a policy pivot.
Meanwhile, Treasury futures are also experiencing mixed signals as longer-period contracts find support from safe-haven flows. Geopolitical instability and potential global slowdown may push investors to seek safety in US government bonds. The 10-year yields remain relatively supported.
Geopolitical developments are weighing on the sentiment as Israel-Iran conflict has entered its eighth day with speculations of US military intervention. Reportedly, President Trump has approved the attack plan but awaits as a last attempt to negotiate with Iran.
