Bond traders are slashing their expectations for Federal Reserve rate cuts this year as Middle East tensions drive oil prices higher and stoke inflation fears. Options data from the Atlanta Fed shows traders now see a 25% chance the Fed will hold rates steady through December, up from 17% last week before the Iran conflict escalated.

This no-cut scenario has become the single most likely outcome, with traders assigning just a 24% probability to one quarter-point reduction and 12% for two cuts. The probability of rate hikes has doubled to 16% from 8% last week. The shift reflects growing concerns that surging crude oil prices—up nearly 20% this week—will keep inflation elevated and limit the Fed's ability to ease monetary policy.

Interest-rate swap markets echo this more hawkish outlook, with traders now pricing in only about 35 basis points of cuts by year-end compared to 60 basis points last week. The reassessment has triggered a Treasuries selloff, pushing yields to their highest levels in weeks and reversing February's rally that was fueled by AI disruption fears and private credit market concerns.