(Bloomberg) -- It’s game on in the Treasuries futures and options markets where traders are piling into bets for earlier, deeper interest-rate cuts from the Federal Reserve.
Traders are shifting their focus to the Fed’s policy moves now that the so-called Trump trade has set in. On Monday, options tied to the Secured Overnight Financing Rate were dominated by fresh wagers targeting either a jumbo cut in September or an easing cycle that begins later this month.
Dovish trades are catching on across the derivatives complex, with traders in SOFR options and fed funds futures increasingly positioning for lower borrowing costs in the world’s top economy.
This month, the swaps market has started pricing in two quarter-point rate reductions this year starting in September — and about 50% odds of a third by year-end.
Open interest in the fed funds futures market — or the amount of new positions held by traders — has soared in the October contracts since the middle of last week. Open interest has risen by approximately 70,500 futures contracts since last Wednesday, the equivalent to roughly $3 million per basis point of additional risk.
Goldman Sachs bolstered the case for cuts when the bank’s economists said Monday they see “a solid rationale” for the Fed to cut rates as soon as the July meeting. Such a turn from the Fed stands to further juice the Trump trade, setting the stage for a sustained slide in the shorter end of the yield curve.
Monday also saw a huge block buy over the morning session that established new long positions in the October tenor. Those bets would benefit from 25-basis point rate cuts in both July and September — or a fifty-point move at the September meeting. Trading in many of these contracts is anonymous, which makes it difficult to identify the firms behind those bets.
That sentiment has spilled over into the cash market, too. The latest JPMorgan Chase & Co. survey released Tuesday showed outright long positions rising to the most since January.
Here’s a rundown of the latest positioning indicators across the rates market:
Going Long
In the week up to July 15, JPMorgan clients extended outright long positions by 2 percentage points to the highest since Jan. 29. The net-long position among all clients now sits at the most in about three weeks.
Options Premium
The premium paid to hedge risk in the long end of the curve has remained skewed toward puts over calls, while premium on front and belly options are closer to neutral. The skew shows traders paying a higher price to hedge a selloff, rather than a rally, via bond options. Recent Treasury flows have included pockets of demand for long vol structures including a $3 million September strangle position which traded Friday.
Muted Futures
Changes in futures positioning among hedge funds and asset managers were mixed and relatively calm in the week leading up to July 9, according to Commodity Futures Trading Commission data. The largest positioning shift on the week was seen in the ultra 10-year note futures where asset managers unwound longs and hedge funds covered short positions.
Active SOFR Options
The past week has seen positioning soar across a number of SOFR December 2024 calls. Activity has included buying of the SOFR Dec24 95.25/95.50 call spread and SOFR Dec24 95.25/95.375/95.50 call fly.
Other popular plays over the past week have included buying of the SOFR Dec24 95.00/95.1875/95.375 call fly and SOFR Dec24 95.0625/95.1875/95.75 broken call tree.
SOFR Options Heat Map
In SOFR options out to the March 2025 tenor, the 94.875 strike remains 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 95.50 open interest has risen sharply this week following the amount of upside being targeted via a variety of SOFR Dec24 call structures. The strikes in focus in the tenor include the 95.25, 95.1875 and 95.50.
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