Investors are increasingly confident that the Federal Reserve will cut interest rates again at its meeting next month, after doubts that suggested otherwise just days ago faded. This shift in sentiment has paved the way for a potential rally in US bonds.
New position volumes in futures contracts linked to the central bank's benchmark interest rate have surged significantly over the past three trading sessions. The January contract saw record daily trading volumes last week. Market pricing now indicates an approximately 80% probability of a quarter-point cut at the December meeting, compared to just 30% a few days ago.
Futures linked to the central bank's benchmark interest rate are derivative contracts traded on exchanges that reflect traders' expectations for the future range of key interest rates. A futures contract on the Fed's interest rate represents a bet on the level at which the US central bank's target interest rate will be in a given month. An increase in the contract price typically reflects the market's expectation of a rate cut, and vice versa.
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