U.S. Treasury options traders are increasingly betting that the Federal Reserve may not implement any interest rate cuts this year. The reason lies in escalating Middle East conflicts, which are driving up oil prices and could further push inflation higher.

Data compiled by the Atlanta Fed show that as of Wednesday, traders assigned a 25% probability that the Fed will maintain the current interest rate range through December. This is up from 17% last Friday, the final trading day before the outbreak of war involving Iran.

Among all possible scenarios, "no rate cuts for the entire year" has become the single most likely outcome. Other possibilities include a 24% chance of one 25-basis-point cut and a 12% probability of two cuts. Meanwhile, traders even assigned a 16% likelihood of a rate hike, up from 8% last Friday. These figures are derived from Secured Overnight Financing Rate (SOFR) futures options, which are linked to the Fed’s policy rate.

Industry experts noted that when oil prices surge, their inflationary impact must be considered. This pushes inflation upward, thereby reducing the likelihood of Fed rate cuts.

Of course, when all scenarios are combined, the overall probability still leans toward rate reductions. However, the latest pricing shifts indicate that as crude prices have climbed nearly 20% this week, traders’ confidence in the Fed’s ability to lower borrowing costs this year has clearly weakened. Recent options trading flows also show sustained demand for hedging against the risk of reduced Fed easing or even no cuts at all.

Another tool used to bet on the Fed’s policy path—the interest rate swaps market—similarly reflects a less dovish stance from the central bank. Traders now expect roughly 35 basis points of cumulative cuts by year-end, compared with around 60 basis points anticipated late last week.

The cooling expectations for rate cuts have triggered a recent sell-off in U.S. Treasuries, pushing yields to multi-week highs. This marks a reversal from February’s strong bond rally, when investors piled into U.S. government debt as a safe haven amid concerns over potential disruptions from artificial intelligence and cracks in the private credit market.