The debate surrounding the Federal Reserve's expected interest rate cut in November is intensifying, as officials begin to consider the Fed's next move and traders increase their bets on futures related to the Fed's policy path.

After the weaker-than-expected U.S. consumer confidence data was released on Tuesday, investors are more inclined to expect another direct cut of 50 basis points in the November 7th decision.

As a result, for the swap market, it has essentially become a coin toss between another significant cut and a more standard 25 basis point cut.

Swap traders currently estimate that the Fed will cut rates by a total of about 75 basis points in the remaining two cuts this year, with the second cut expected to take place on December 18th, implying that one of the meetings will see a 50 basis point cut.

Nathan Thooft, Senior Portfolio Manager at Manulife Investment Management, said: "We are getting closer to a 50 basis point cut."

"Officially, we have not changed our stance, and our view for this year is two cuts of 25 basis points each, so one in November and one in December."

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Position data shows that since the Fed made its decision last week, the rate market has begun to prepare for November 7th.

The open interest in two-year U.S. Treasury futures has increased significantly.

The number of contracts held by traders expiring in December 2024 has climbed to about 4.4 million, the highest so far, and this contract is closely related to the Fed's expected trajectory.

Bets on December futures related to the Secured Overnight Financing Rate (SOFR) have also risen noticeably.

However, due to several policymakers sending mixed signals about the November meeting, traders are not heavily betting in one direction, which is different from the situation before the Fed's 50 basis point cut on September 18th.

On Tuesday, Federal Reserve Governor Michelle Bowman said that the Fed should cut rates at a "measured" pace, the day after two other officials downplayed the possibility of a 50 basis point cut.

Meanwhile, Chicago Fed President Austan Goolsbee said that rates need to be "significantly" lowered.

Meanwhile, in the spot Treasury market, the bullish momentum before last week's Fed meeting remains unchanged, with net long positions held by JPMorgan's Treasury clients remaining stable as of September 23rd.

During this period, the benchmark 10-year Treasury yield rose by about 12 basis points to around 3.73% due to the steepening trade in the bond market following the Fed's rate cut.

Here is an overview of the latest position indicators in the rate market: In the most recent week surveyed by JPMorgan, both direct long and short positions of JPMorgan's Treasury clients increased by 2 percentage points, with net long positions remaining unchanged at 6 percentage points.

The number of clients directly short across the board is currently at its highest level in a month.

Asset managers and hedge funds are long on SOFR futures.

For asset managers and hedge funds, positions in SOFR futures remain net long, indicating that they are preparing for further rate cuts.

CFTC data shows that in the week ending September 17th, the day before the Fed's rate cut, asset managers increased their net long positions by about $2 million per basis point of risk, while hedge funds closed long positions in SOFR futures by about $2.6 million per basis point.

In terms of Treasury futures, during the reporting week, asset managers added about 135,000 long positions in 10-year Treasury futures contracts, while hedge funds added nearly 300,000 short positions in 10-year Treasury futures contracts.

The most active SOFR options over the past week, the SOFR options with a strike price of 98.75 have been among the most active options.

This is due to a large number of moderately bearish positions on rates established through the SFRH5 97.75/98.75 2x3 call spread on March 25th, with about 80,000 long positions already formed.

After recent capital flows including the purchase of SFRZ4 96.00/95.75 1x2 put spreads, additional position increases have been seen in the December 24th put options.

SOFR options heatmap In the SOFR options market, for contracts expiring in June 2025, the strike price of 95.50 remains one of the most actively traded levels, with a large number of call and put options expiring on December 24th having substantial positions at this level.

There has been a recent increase in direct purchases of the December 24th 95.50 put options, leading to an increase in open interest at this strike price.

Activity to protect against downside risk in options has also increased in the past week, including the purchase of SFRZ4 95.625/95.50 put spreads, and the purchase of SFRZ4 95.5625/95.4375 put spreads for 1.

Option premiums remain near neutral Over the past week, premiums paid to hedge the market continued to hover near neutral, ranging from the front to the middle, while they had soared to bullish premiums a few weeks ago as traders expected the market to continue to rebound.

On the long end of the yield curve, premiums have begun to rise to hedge against selling, which can be seen from the negative skew of long-term bond call/put spreads, while traders expect the yield curve to steepen further.