(Bloomberg) — US Treasuries held onto recent gains 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.
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Yields were little modified across the curve on Wednesday, with two-year rates hovering across the lowest level in greater than a month, because the market awaited Powell’s afternoon press conference for clues on the outlook for policy. The US central bank is overwhelmingly expected to maintain rates regular this week, though swaps are pricing in a roughly 30% probability of a cut in March.
Traders have lots riding on Powell’s remarks. Expectations for further easing climbed to begin this week during a tech-driven rout in stocks and the risk-off vibe produced a wave of wagers on Treasuries gains. JPMorgan Chase & Co.’s latest client survey released Tuesday shows the largest 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. “Probably the most recent inflation publication was quite benign, not to say the potential deflationary impact of the newest AI developments.”
Hedging for a possible March rate cut is smart after December’s cooler-than-expected inflation print and Fed Governor Christopher Waller’s comment that easing by mid-year is feasible. The massive query mark, in fact, stays President Donald Trump’s tariff plans and their impact on the economy.
Given the shortage of clarity across 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 one other sign that long positions are constructing in Treasuries, open interest in futures — or the quantity of recent 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 much bigger bond rally. Profits on the position got a lift from Monday’s surge in haven assets.
Morgan Stanley sees Wednesday’s meeting as a catalyst for one more leg lower in Treasury yields, with strategists led by Matthew Hornbach recommending investors stay long the 5-year and position for a March cut.
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Here’s a rundown of the newest positioning indicators across the rates market:
JPMorgan Treasury Client Survey
Within the week to Jan. 27, JPMorgan clients’ net long positioning rose to the largest since October 2010. Outright longs rose on the week by six percentage points to the best 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%.
Treasury Options Premium Flips to Calls
The premium on hedging in Treasuries has flipped to favor calls over puts for the primary time because the end of last yr, with the brunt of the shift occurring during Monday’s sharp flight-to-quality move. The move to favor protection against a much 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 approaching weeks.
Most Lively SOFR Options
Open interest changes have been dominated over the past week by the addition of positions across three strikes contained within the SOFR Sep25 95.875/95.625/95.375 put fly structure, which Jan. 23 open interest showed as recent risk. There has also been an honest amount of risk added within the 96.00 calls over the past week following recent flows including outright buying within the strike at 11 for brand spanking new risk.
SOFR Options Heatmap
In SOFR options out to the Sep25 tenor, the most-populated strike stays at 96.00, largely resulting from heavy amount of Mar25 calls and Jun25 puts at that level. There has also been recent buying within the Jun25 calls, adding to the outstanding risk seen within the strike. Popular flows across 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.
CFTC Futures Positioning
In CFTC data to Jan. 21, hedge funds prolonged net short positions in each SOFR and 10-year note futures for a combined risk amount of just about $10m/DV01. Over the week, nevertheless, the web duration change amongst hedge funds was near flat given short covering within 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.