Market panic betting suggests the Federal Reserve may raise interest rates urgently within weeks if the war spirals out of control.

According to Mars Finance, market sources indicate that bond traders, panicked by the potential escalation of the conflict with Iran, are seeking to hedge against the worst-case scenario—a possible interest rate hike by the Federal Reserve in the coming weeks. In the options market, which tracks Fed policy, demand for bets linked to the Secured Overnight Financing Rate (SOFR) has emerged, corresponding to a rate hike scenario as early as two weeks ago. These trades will profit if the bond market significantly increases its expectations of a rate hike before the Fed's policy meeting on April 29. This surge in hedging demand against an emergency rate hike marks a sharp reversal in market sentiment. Jeff Schuh, head of interest rates at Constitution Capital, stated that while the latest bets do not reflect the market's baseline scenario, they do indicate growing market anxiety that rapidly rising inflation will put investors who long on US Treasuries in recent months at risk. Currently, the interest rate swap market only prices in a 3-basis-point rate hike at the April 29 policy meeting, or a 12% probability of a 25-basis-point hike.