Traders appear to be backing out on the idea that the Federal Reserve will trim rates this year, as is apparent from the U.S. short-term interest-rates market, a report stated.

Options open interest, which shows the amount of risk held by traders, declined sharply across a number of strikes shown by preliminary CME data released Monday, reported Bloomberg. This is a sign of capitulation following heavy pull-backs from rate-cut bets taken earlier, it said.

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The fears seem to be justified given the fact that Fed Chair Jerome Powell indicated the central bank could hike rates by another 50 basis points this year. He also reiterated the central bank's dedication to bring inflation down to the 2% goal, during his testimony before the House Financial Services Committee.

Given the fact that services inflation continues to remain sticky and with the Fed reiterating its commitment to bring down inflation to its 2% target, a rate cut appears unlikely this year.

Price Action: Yield on the policy-sensitive two-year treasury notes was last trading at 4.69% — lower than the June highs of 4.81%. At the same time, swaps linked to Fed meetings are currently factoring in that the policy rate will peak after just one more 25-basis-point move, the report said. This, however, marks a stark shift from the expectations of rate cuts that were priced earlier.

The iShares 1-3 Year Treasury Bond ETF (NASDAQ:SHY) and the Vanguard Short-Term Treasury Index Fund ETF (NASDAQ:VGSH) closed 0.07% higher on Monday, according to Benzinga Pro.

Traders Unwind Fed Rate Cut Bets This Year After Powell's Hawkish Stance

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