Bond traders are dramatically scaling back expectations for Federal Reserve rate cuts as the war with Iran drives inflation concerns. The spread between December 2026 and December 2027 Secured Overnight Financing Rate contracts hit a fresh low of negative 15 basis points, reflecting a sharp reversal from just weeks ago when investors priced in multiple rate cuts for 2026.

This shift follows a period when markets focused on deflationary pressures from artificial intelligence and a cooling jobs market. Now, fears of an oil price spike from the conflict are pushing traders to reassess Fed policy. The December 2026 to December 2027 spread saw record volume of 180,000 futures on Monday as investors adjusted their positions.

Across major markets, similar patterns emerged. European Central Bank and Bank of England futures also signaled reduced rate cut expectations, with some pricing in potential rate increases. The dollar swap spread widener trade has wobbled as investors weigh fiscal implications of prolonged conflict, with longer-dated spreads at their tightest since August.