(Bloomberg) -- Traders are betting on a rally in the $27 trillion Treasury market as Federal Reserve Chair Jerome Powell casts a spotlight on the importance of US inflation data.
Every day since July 1, traders have built bullish bond wagers in anticipation of the Fed chair’s testimony to Congress and a reading of the consumer price index this week, positioning data show. Those bets stand to benefit if Powell’s remarks or the inflation data on Thursday bolster expectations for interest-rate cuts this year.
Bullish sentiment is also evident in the cash market, with a JPMorgan Chase & Co. survey showing clients increased long wagers to the most in two weeks. Treasuries inched higher on Wednesday as the market awaited a second dose of Powell on Capitol Hill.
Open interest in 10-year note futures has risen in every session so far this month — for a combined amount of about 159,000 contracts. In the September tenor, open interest in 10-year note futures has risen to almost 4.5 million contracts, the most in the current contract cycle.
At the same time, the yield on 10-year Treasuries has dropped more than 20 basis points, signaling that traders were creating new long positions. Similar trends have emerged in two- and five-year note futures, too.
That bullish sentiment was tempered slightly on Tuesday as Powell said the Fed was looking for “more good data” that showed cooling inflation. He also said policymakers were aware that they face risks tied to both cutting rates too soon or too late.
Still, swaps traders are pricing in about two quarter-point cuts this year, with a roughly 70% chance the first comes at the September policy meeting.
“Right now, the data is very clear,” Kelsey Berro, executive director for fixed income at JPMorgan Asset Management, said on Bloomberg Surveillance. “And it is sending a green light to the Fed that they can adjust policy.”
Here’s a rundown of the latest positioning indicators across the rates market:
JPMorgan Clients Add to Longs, Shorts
In the week ending July 8, JPMorgan clients increased their outright long positions by 5 percentage points to the most in two weeks. Over the same period, outright shorts also increased by 2 percentage points. Outright shorts are now the highest since June 10.
Options Premium Favors Puts in Long-End
The premium paid to hedge risk in the long end of the curve has remained skewed toward puts over calls as traders paid a higher price to hedge a selloff, rather than a rally, via bond options. The skew in the front and belly of the curve continues to slightly favor call options, indicating traders are paying a premium to hedge a rally over selloff in these tenors. Recent Treasury flows have included a bearish 10-year hedge targeting 10-year yield rise to 4.4% before July 26, along with a near-term long volatility play via 10-year weekly options.
Asset Managers Net Duration Long Builds
Real money accounts continue to build out net duration longs in futures by adding an additional 156,000 10-year note futures equivalents in the week leading up to July 2, according to Commodity Futures Trading Commission data. Hedge funds extended net short position by roughly 87,000 10-year note futures equivalents. The biggest net positioning add among asset managers over the week was seen in 10-year and ultra 10-year note futures for a combined $10.7m/DV01 in risk.
Active SOFR Options
Over the past week, the 94.875 strike has been among the most actively traded out to March 2025 tenor, with flows involving the strike including buying of the SFRU4 94.75/94.875/95.00 call fly along with downside such as the SFRH5 95.00/94.875/94.6875/94.5625 put condor and the SFRU4 94.875/94.75/94.625 put fly. There was also a large amount of open interest gained on the 95.1875 strike with flows over the past week including buying of the SFRZ4 95.0625/95.1875/95.3125 call fly.
SOFR Options Heat Map
In SOFR options out to the March 2025 tenor, the 94.875 strike now contains the heaviest amount of open interest, due to large positions being added via Sep24 calls and puts. Recent flows have included buying of the SFRU4 94.75/94.875/95.00 call fly. The 94.625 strike also remains active, with recent flows including including SFRU4 94.6875/94.625 1x2 put spread and SFRU4 94.875/94.75/94.625 put fly, along with the SFRU4 94.6875/94.625 1x2 put spread which was recently active.
(Updates with Treasuries moves in third paragraph)
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