Market Uncertainty Sparks Shift in Bond Trader Bets
As President Donald Trump’s tariff plans continue to cast a shadow over the economy, bond traders are rapidly unwinding their bets on two-year Treasury futures. The uncertainty surrounding the president’s proposals has led to a significant decrease in open interest, or the amount of risk held by traders, over the past five sessions.
Tariff Threats Intensify
Trump’s recent expansion of tariff threats to include China and the European Union has heightened concerns about the potential impact on inflation. While the president has yet to impose any tariffs, the mere threat has been enough to push wagers on further Federal Reserve easing out to mid-year.
Position Trimming Accelerates
The combined amount of position trimming since January 14 amounts to approximately $5.8 million per basis point, or roughly $32 billion of cash two-year notes. This pullback is a result of a mix of both short covering and the liquidation of long positions during a volatile stretch when markets absorbed the tariff comments, cooler-than-forecast inflation data, and dovish remarks from Fed Governor Christopher Waller.
Options Market Signals Caution
In the options market linked to the Secured Overnight Financing Rate, a standout trade targeted a scenario where the central bank doesn’t cut interest rates this year. The swaps market currently prices in about 0.40 percentage points of easing by December’s Fed meeting.
Rates Market Positioning
A survey of JPMorgan Chase & Co. Treasury clients showed a more bullish appetite, with outright longs extending by 2 percentage points to the biggest since December 2023. Short positions dropped 4 percentage points, while neutrals rose 2 percentage points. Meanwhile, the premium on Treasury option hedges remains skewed toward puts, as traders pay up to hedge against a bond-market selloff over a rally.
SOFR Options Heatmap
In SOFR options out to the Sep25 tenor, the most-populated strike remains at 96.00, largely due to a 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.
CFTC Futures Positioning
In CFTC data to January 14, hedge funds covered their net short position by approximately 200,000 10-year note futures equivalents, after around 264,000 10-year note futures equivalent of short covering seen the week before. On the flip side, hedge funds unwound approximately 76,000 10-year note futures equivalents of net long positions, after around 126,000 10-year notes of long liquidation the week before.
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