Why Some Bond Traders Bet Relentless Selloff Will Soon Lose Steam

Bloomberg01-15

Options bet eyes US 10-year falling toward 4.6% within weeksJPMorgan client survey shows largest long bias since 2023Some bond traders are betting that the relentless selloff in Treasuries will soon ...

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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 SurveyIn 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 PutsThe 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 OptionsOver 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 HeatmapIn 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 PositioningIn 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.","kind":"news","is_publish_news":true,"is_publish_highlight":true,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0,"need_auth":false,"code":"91000000","status":"200"},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":6,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.35.12","shortVersion":"4.35.12","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1114905888","isCrawlerRequest":true}