Bond traders are seeking protection against the worst-case war scenario stemming from potential escalation in the Iran conflict, betting that the Federal Reserve might be forced to raise interest rates in the coming weeks. Demand has emerged in the options market tracking Fed policy for bets tied to the Secured Overnight Financing Rate (SOFR) that anticipate a rate hike as early as two weeks from now. These trades would profit if the bond market significantly repricing expectations for a rate hike before the Fed's policy meeting on April 29. This surge in demand for emergency rate hike hedges marks a sharp reversal in market sentiment. Just a month ago, the market was pricing in as many as three 25-basis-point rate cuts by the end of the year. Since the conflict began on February 28, swap market traders have begun pricing in about a 50% chance of a rate hike by December, putting short-term Treasury bills at risk of further repricing. Jeff Schuh, head of rates at Constitution Capital, stated that while the latest bets don't reflect the market's base case scenario, they do signal growing concern that rapidly rising inflation could put investors who have been long Treasuries in recent months at risk. Schuh noted that traders have been unwinding large long positions in Treasury futures as soaring oil prices fuel renewed inflation fears. The sell-off in SOFR futures and the upward move across the entire Treasury yield curve have caught many large funds off guard. He pointed out that such trades are a "cheap hedge that makes liquidation risk look more manageable in 90% of cases."