It is said that traders are betting on rate hikes or cuts…but how exactly does this work?

While wondering which direction interest rates will go in, you may hear media outlets say that markets and/or traders are ‘betting on rate hikes or cuts’. We thought it was time for an article to explain how exactly this works.

What are the Best ASX Stocks to invest in right now?

Check our buy/sell tips

How can it be said that traders are betting on rate hikes or cuts?

First of all we will assume investors know what bonds are and how they work.

This is the foundation: If interest rates fall, existing bonds with higher coupons become more valuable, so their prices rise. But if interest rates rise, bond prices fall.

So if an investor expects central banks to cut interest rates in the future, they can buy bonds now expecting those bonds to rise in value when rates actually fall. This price change is the “bet”.

What investors do is buy longer-dated bonds. Because long-dated bonds (the 10 and 20 year bonds) are more sensitive to changes in interest rates than short-term bonds. This sensitivity is called duration. A long-duration bond might rise 6–12% if yields fall by 1 percentage point. A short-duration bond might rise only 1–3%.

So if you believe rate cuts are coming, you buy long-duration bonds. This is the core “bet”. But if you think rate hikes are coming, you buy shorter bonds.

If markets expect rate cuts in the next 12 months, then bond yields will already be lower today than if cuts were not expected. Bond investors who think more cuts will happen than the market expects buy bonds now, expecting yields to drop further.

They are betting against the consensus about how fast or how far rates will fall. This is the real money-making opportunity.

You can do it too

First, we stress this is not financial advice. But individual investors can either buy bonds, wait for yields to fall then sell and profit; or they could short them. They could buy bonds directly or buy ETFs that track bonds such as GOVT (the Government Bond ETF).

Professional investors use futures to bet directly on future central-bank decisions. You could Buying 3-month bank bill futures if you expect the RBA to cut; or but Buying US Fed Funds futures if you expect the Fed to cut. If the central bank cuts sooner or deeper than priced in, the futures profit.

Some even enter a receive-fixed interest rate swap and bet on falling swap rates. This is how banks and institutions express rate-cut views.

Why is it a ‘bet’?

Is is like gambling casino? Yes and no. It is different from gambling as a casino, but it is a belief about future rate changes and trying to make money from it.  You profit if you are right about: the direction (rates down or up), the timing, the magnitude of cuts and how your view differs from what’s already priced in

If the RBA/Fed cuts less than expected — or later — you can lose money, because bond yields will stay higher than you predicted.

Say a 10-year government bond yields 4% today. You think: inflation is falling, the economy is slowing and the RBA will cut rates next year; So you buy the bond.

6 months later, markets price in more cuts and 10-year yields fall to 3%. Because of this: your bond with a 4% coupon is now more valuable and bond price rises (maybe by 5–10%). You sell and make a profit. That profit is the result of your interest rate cut bet.

What do markets think right now?

There’s a 100% market-priced chance of Fed rate cuts in 2026 and 50% market-priced chance of an RBA rate hike by May 2026. Let’s look at What these probabilities actually mean in financial markets, How the pricing shows up in bonds and futures, and how investors “bet” on these probabilities being right or wrong.

These figures are not forecasts but probabilities implied by market prices in Fed funds futures (for the US) and RBA cash-rate futures / bank-bill futures (for Australia). Every other economy would have its own equivalent. Markets convert the current futures price into an implied probability distribution of rate moves.

The scenario of a 100% chance of rate cuts in the US means futures are pricing in rate cuts as a certainty — i.e., the implied policy rate for 2026 is lower than today by an amount that can’t be explained by randomness alone. But in Australia, futures are pricing a 50–50 probability of the RBA lifting rates at that meeting.

How it works

In the US scenario, this means Fed Funds Futures for 2026 will be trading at prices implying a lower Fed funds rate next year and specific number of cuts (e.g., 3 × 25 bp cuts)

Since futures price = 100 − implied interest rate: if the implied rate is 3.75%, the future’s price is 96.25. If today’s actual rate is 4.75% and futures price implies 3.75%, then the market is pricing in: 100 bps of cuts with 100% probability. This means yields on 2, 5 and 10 year treasuries fall and bond prices rise as investors expect lower future rates.

Meanwhile in Australia where it is 50-50, this shows up in the 90-day bank bill futures or ASX cash-rate futures.

If the RBA cash rate today is 4.35%, the futures contract for May might imply 4.35% (no hike), or 4.60% (one 25 bp hike). A 50% implied probability looks like this: Implied futures rate = 0.5 × 4.35 + 0.5 × 4.60 = 4.475%. Converted into futures price this is 95.525.

That tells traders the market is priced halfway between “hike” and “no hike”.

Conclusion

Neither thesis (that there’s a 100% chance of a Fed rate cut in 2026 and a 50% chance of a rate hike in Australia in 2026) is a guarantee — just the consensus of all money on the table right now. But we hope this article has explained how the ‘betting’ on interest rates works.