Traders anticipate that the risk of recession will force the Federal Reserve to stimulate the economy by cutting interest rates

Traders in the futures and options markets are betting that due to the Trump administration's aggressive policy agenda, the Federal Reserve's interest rate cuts this year will exceed expectations.

Washington's tough talk on tariffs has pushed investors towards safe-haven assets like U.S. Treasury bonds, which will become more attractive if signs of economic difficulty continue to increase.

On Monday, rising possibilities of an economic recession stimulated new demand for short-term and long-term U.S. Treasury bond futures. Options traders anticipate that recession risks will put more pressure on the Federal Reserve, forcing it to boost the economy by cutting interest rates in the coming months.

This has led to a growing demand for bullish options on two-year U.S. Treasuries, which would pay off if the Fed becomes more aggressive on interest rates.

The premium for these bullish Treasury options has risen to its highest point since September last year when job growth slowed during Biden’s final months as president, sparking concerns about an economic slowdown.