Treasuries Traders Are Targeting an Even Bigger Rally Ahead

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(Bloomberg) — Mounting worries over the economic impact of tariffs have traders betting that this year’s almost 3% rally in the US bond market is set to gather more strength.

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A survey of JPMorgan clients published Tuesday showed wagers on further gains — so-called net bullish positions — are at their highest level in 15 years. Large block trades betting on the benchmark 10-year yield falling below 4% are proliferating, while demand for options to hedge against further price increases is on the rise. 

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Rates on 10-year Treasuries are now roughly 25 basis points away from sliding through that key 4% level, with bonds steady on Wednesday ahead of economic reports on private payrolls, factory orders and services activity.

Driving those bets has been investors’ increasing certainty that President Donald Trump’s tariff war will rattle the US economy, sentiment that this week saw traders add to expectations for interest-rate cuts by the Federal Reserve. Anticipation of weaker growth tends to drag Treasury yields lower and push up bond prices, as investors hurry to price in the rate cuts that a slowing economy typically brings.

So far, the moves contrast with plans laid out by the Trump administration, which envisioned lowering yields by reducing energy costs and slashing the deficit enough to ease Wall Street’s concerns about the ever-rising supply of new government bonds. 

“The market continues to be spooked by the potential of lower growth,” Citi strategist David Bieber wrote. “Tactical positioning is now one-sided long and deeply in profit.”

Traders are gearing up for jobs data on Friday that offers a crucial read on the health of the US economy following Trump’s first month in office. But before then, they could also get more detail on whether new 25% duties imposed Tuesday on most Canadian and Mexican imports — and a decision to raise tariffs on China — are here to stay. 

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Commerce Secretary Howard Lutnick told Fox Business Network that Trump may yet offer a pathway for tariff relief for Mexico and Canada. That news whipped markets in late trading on Tuesday.

Here’s a rundown of the latest positioning indicators across the rates market:   

Big bets

Traders have been putting money to work on the back of lower Treasury yields, as recent activity in the 10-year options market has soared. The bulk of the action however has been focused in the April and May 10-year call options, on strikes specifically targeting yields at 4.15% and then as low as 3.85%. The activity has also bled into 5-year Treasuries, where one trade Tuesday looked to aim for a 3.35% yield level.

Open interest, or the amount of risk held by traders in Treasury options, has surged across a number of call strikes on 10-year notes. The trades have been making money. One example is a position bought on Monday in May calls for a premium of roughly $27 million. Following Tuesday’s extension of the bond market rally, the same position was worth approximately $40 million, at one point. Over the past week, approximately $150 million has been spent on a handful of stand out trades. 

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JPMorgan Treasury Client Survey

A survey of JPMorgan Treasury clients showed a rise in long positions of 8 percentage points and a drop in neutrals by 9 percentage points in the week to March 3. The short positioning increased 1 percentage point. The client net positioning has now shifted to the biggest long since October 2010. 

Treasury Options Premium  

The options hedging premium in Treasuries has remained close to the highest price paid by traders since August to hedge a rally in the long-end of the curve. This is shown by the put/call skew on long-bond futures, which has risen over the past couple of weeks, favoring calls. There has been an influx of call buying over the period, fueling the rising price of calls versus puts, as traders look to target a 10-year yield move to 4% and below. On Monday a $27 million premium trade was seen to hedge a 10-year yield to around 4.1% by the April 25 expiry.  

Futures De-Leveraging Extends

De-leveraging by asset managers and hedge funds extended for the third week in a row, CFTC positioning data up to Feb. 25 shows. Over three weeks since Feb. 11, asset managers have seen a net duration long unwind of approximately 423,000 10-year note futures equivalents while hedge funds have covered approximately 600,000 10-year note futures equivalent to net duration short over the same period. In the latest week, hedge funds were most actively de-leveraging in ultra-long bonds, where the net short was reduced by roughly $7.5 million per basis point in risk, while asset managers liquidated approximately $4.3 million per basis point in risk to net 2-year long position. 

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Most Active SOFR Options

Open interest jumped across a number of Jun25 call strikes over the past week, as traders looked to target two more Fed rate cuts over the first half of this year. Stand out flows included heavy buying in the SFRM5 96.1875/96.25 call spread bought at 0.625. Past week has also seen buying in the Sep25 96.25 calls outright, where positioning is up to around 110,000 after being bought heavily at 11 and 11.5 ticks. Also for new risk, the SFRU5 96.25/96.375 call spread has been bought over the past week. 

SOFR Options Heatmap

In SOFR options out to the Sep25 tenor, the 96.00 strike remains the most populated, despite recent liquidation of the SFRM5 96.50/96.00/95.50 put fly which has seen open interest drop in the strike. Elsewhere, the 95.625 strike remains heavily populated, with recent flows including decent buying in the SOFR Sep25 95.875/95.625/95.375 put fly. 

(Updates with latest market moves and news from third paragraph.)

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