(Bloomberg) -- Financial markets have become far too optimistic about how much the Federal Reserve will cut interest rates next year, giving options traders a chance to profit from betting against that view, according to Goldman Sachs.

Roughly 1.25 percentage points of cuts are now priced in over the next 12 months, with about a half-point of cuts occurring by June — which suggests a US economy that’s already on the brink of a downturn, strategists including including Praveen Korapaty wrote in a Dec. 1 note. That’s also far more aggressive than Goldman’s own baseline forecast, which calls for a single quarter point cut in 2024.

“Markets are approaching the limits of what can plausibly be priced without attaching material odds of a recession in the near term,” they said. 

The Goldman strategists recommend selling the June 2024 SOFR 95.25 call option as a play to bet against some of the front-loaded cut pricing. The option is linked to the Secured Overnight Financing Rate, which closely tracks expectations for the Fed’s policy path. The tenor expires June 14, two day’s after the central bank’s June policy announcement.

In recent sessions traders have been ramping-up pricing of rate cuts for next year across the futures, options and cash markets. In Commodity Futures Trading Commission data released Friday, leveraged net positioning in SOFR futures was extended to a fresh record long. 

Meanwhile in options, bets have emerged targeting rate cuts totaling as much as 250 basis points by September, about 150 basis points more than what’s currently priced into the swaps market. In the cash market, JPMorgan Chase & Co.’s Treasury client survey, conducted weekly since 1991, found that the most active investors in the market are as bullish as they’ve ever been.

Read More: Everywhere You Look, Rates Traders Are Piling Into Rate-Cut Bets

Price action so far on Monday has captured some of this sentiment to fade the aggressive rate-cut pricing for next year, with 2-year yields higher by about 10 basis points on the day shortly after 10:30 a.m. in New York. Friday’s aggressive rally saw 2-year yields close down 14 basis points, helped by weaker-than-forecast ISM manufacturing data. 

“Both the magnitude and front-loading of easing currently priced are likely excessive,” the strategists said.

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