(Bloomberg) -- Some bond traders are betting that the relentless selloff in Treasuries will soon lose momentum, in part because of questions around how President-elect Donald Trump's policies will take shape.
Traders have been adding options wagers that yields will retreat from the 14-month highs reached in the wake of Friday's robust US jobs report, which dashed expectations for further Federal Reserve interest-rate cuts any time soon. One stand-out trade Tuesday, costing a premium of more than $40 million, targeted a drop in 10-year yields to 4.6% by Feb. 21, from roughly 4.8% now.
Wednesday brings the next pivotal data point, with the release of the latest consumer-price figures, which are forecast to show inflation remains sticky. Bonds have been slumping since early December, driving the 10-year yield up from around 4.15%, on signs of a resilient economy and speculation that Trump's proposals will spur even quicker growth. There's also concern that his tariff plans will reignite inflation.
However, a report Monday that his administration may implement tariffs gradually signaled the potential for a reduced inflationary impact, giving Treasuries a brief boost. The report drove home how much uncertainty there is around the policy mix investors will face under Trump. Bonds also drew fleeting support on Tuesday from a cooler-than-projected report on producer prices.
All the lingering questions about the coming year are leading bond investors such as Pacific Investment Management Co. to predict attractive returns ahead, while one prominent bear, RBC BlueBay Asset Management, has said it's time to take some chips off the table.
In a sign of increasing bullishness in the cash market, JPMorgan Chase & Co.'s latest client survey showed long positions increasing to the biggest in over a year, while short positions dwindled.
Meanwhile, in options linked to the Secured Overnight Financing Rate — which closely tracks the Fed's expected policy path — some traders have started to position for a more dovish outlook than the current market consensus. The swaps market is pricing in just one more quarter-point of easing for the current policy cycle, but trades this week have targeted at least two more cuts this year.
Here's a rundown of the latest positioning indicators across the rates market:
JPMorgan Treasury Client Survey
In the week to Jan. 13, JPMorgan clients' outright long positions increased by a percentage point to the most since December 2023, while outright short positions fell two percentage points. The net long position now stands at the highest since Nov. 4.
Treasury Options Premium Favoring Puts
The cost to protect against a selloff in the long end of the Treasury curve continues to trade at a premium to the front and the belly. The options skew favoring puts in the long-bond contract remain close to the most elevated levels this year. The move matches the grind higher in Treasury yields following Friday's jobs report, which put a 5% 10-year yield back on traders' radar.
Most Active SOFR Options
Over the past week, there has been a decent amount of new risk added in the 95.6875 strike, following flows including a large upside structure in Jun25 options via buying of the SFRM5 96.0625/96.1875 call spread vs. selling the SFRM5 95.6875/95.625 put spread. The 95.5625 strike has also been active over the past week with flows including buyer of SFRH5 96.125/96.375 call spreads vs. selling SFRH5 95.5625 puts. Wide range of trades have also been seen around the 95.75 strikes with recent flows including buyer of SFRZ5 95.75/95.625/95.50 put flies.
SOFR Options Heatmap
In SOFR options out to the Sep25 tenor, the most-populated strike has been 96.00, largely due to heavy amount of Mar25 calls and Jun25 puts at that level. Recent flows around the strike have also included buyers of the SFRZ5 96.00/96.50/97.00 call fly, while the SFRH5 96.00/96.25/96.50 call fly has also been popular. Also for new risk the SFRM5 96.00/96.25 call spread has been bought over the past week.
CFTC Futures Positioning
In CFTC data to Jan. 7, hedge funds aggressively covered short positions across the futures strip by a risk amount equivalent to approximately 263,000 10-year note futures, the heaviest short covering since the end of November. On the flip side, asset manager net long positions were unwound by approximately 125,000 10-year note futures equivalents.
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