Markets panic, betting that if the war gets out of control, the Federal Reserve may raise interest rates urgently within weeks

According to market news, bond traders, panicked by the possible escalation of the conflict in Iran, are seeking to hedge against the worst-case consequences of the war-that is, the Federal Reserve may be forced to raise interest rates in the next few weeks. In the options market that tracks Fed policy, demand has emerged for bets tied to the Guaranteed Overnight Financing Rate (SOFR), bets that correspond to a scenario where interest rates could be raised as early as two weeks. These deals will benefit if the bond market significantly raises interest rate increases expectations before the Fed's policy meeting on April 29. This surge in demand for hedging against emergency interest rate hikes marks a sharp reversal in market sentiment. Jeff Schuh, head of interest rates at Constitution Capital, said that while the latest bets do not reflect the market's benchmark scenario, they do signal growing concerns that rapidly rising inflation will put investors who have made more debt in recent months at risk. Currently, the interest rate swap market only takes into account the 3 basis point interest rate increase at the policy meeting on April 29, that is, the probability of a 25 basis point interest rate increase is 12%.