Traders hedged the risk of multiple interest rate cuts by the Fed until mid-2026 through SOFR options.

On December 4th, the SOFR options market continued to focus on a recent theme: traders are paying attention to various structural trades for the first two quarters of next year to hedge against the possibility of multiple rate cuts by the Federal Reserve, including the possibility of a 50 basis point cut. The overnight index swap linked to the Fed is currently pricing in an effective rate of around 3.30% for the June meeting next year, about 60 basis points lower than the Fed's current effective rate. The prevailing theme in the past few trading days has been buying call structures in January, March, and June SOFR options, aimed at hedging against the expectation of more rate cuts priced into the swap market.