by Edward Bolingbroke
US Treasuries gained ahead of the Federal Reserve’s interest-rate decision as traders ratcheted up bullish bets in hope that Chair Jerome Powell will signal a cut in March is firmly on the table.
Yields slipped around one basis point across the curve on Wednesday, as the market awaited Powell’s afternoon press conference for any clues on the outlook for policy as inflation remains sticky. The US central bank is overwhelmingly expected to keep rates steady this week, though swaps are pricing in a roughly 30% chance of a cut in March.
Traders have a lot riding on Powell’s remarks. Expectations for further easing climbed to start this week during a tech-driven rout in stocks. The risk-off vibe pushed two-year Treasury yields to the lowest in more than a month and produced a wave of wagers on Treasuries gains. JPMorgan Chase & Co.’s latest client survey released Tuesday shows the biggest net long position in US government debt in almost 15 years.
“The Fed has shown an accommodative bias,” said Kevin Thozet, a member of the investment committee at Carmignac, who favors US Treasuries over European sovereigns. “The most recent inflation publication was quite benign, not to mention the potential deflationary impact of the latest AI developments.”
Hedging for a possible March rate cut makes sense after December’s cooler than expected inflation print and Fed Governor Christopher Waller’s comment that easing by mid-year is possible. The big question mark, of course, remains President Donald Trump’s tariff plans and their impact on the economy.
Given the lack of clarity around the levies, “this might see Powell hesitate at taking a March meeting cut off the table for the sake of optionality,” despite what appears to be a stable labor market, Citigroup Inc. rates strategist Edward Acton said in a note.
In another sign that long positions are building in Treasuries, open interest in futures — or the amount of new risk held by traders — is increasing in 10-year note contracts, particularly following Monday’s bond rally. In options, a standout trade in recent sessions has also targeted a bigger bond rally. Profits on the position got a boost from Monday’s surge in haven assets.
Haven-Bid Provides Fresh Wave of Long Wagers in Treasury Futures
Here’s a rundown of the latest positioning indicators across the rates market:
In the week to Jan. 27, JPMorgan clients’ net long positioning rose to the biggest since October 2010. Outright longs rose on the week by six percentage points to the highest since November 2023, while short positions were unchanged. The last time JPMorgan clients were this net long, US 10-year yields were around 2.6%.
The premium on hedging in Treasuries has flipped to favor calls over puts for the first time since the end of last year, with the brunt of the shift occuring during Monday’s sharp flight-to-quality move. The move to favor protection against a bigger bond rally has also been seen in recent flows where a trade costing a premium of about $72 million has emerged hedging lower yields over the coming weeks.
Open interest changes have been dominated over the past week by the addition of positions across three strikes contained in the SOFR Sep25 95.875/95.625/95.375 put fly structure, which Jan. 23 open interest showed as new risk. There has also been a decent amount of risk added in the 96.00 calls over the past week following recent flows including outright buying in the strike at 11 for new risk.
In SOFR options out to the Sep25 tenor, the most-populated strike remains at 96.00, largely due to heavy amount of Mar25 calls and Jun25 puts at that level. There has also been recent buying in the Jun25 calls, adding to the outstanding risk seen in the strike. Popular 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 traded.
In CFTC data to Jan. 21, hedge funds extended net short positions in both SOFR and 10-year note futures for a combined risk amount of almost $10m/DV01. Over the week, however, the net duration change among hedge funds was close to flat given short covering in the long end of the curve. On the flip side, asset managers liquidated net duration long by a small amount, for the third week in a row.
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