"Rate cut trade" sweeps the U.S. bond market! Traders have been increasing their bets on a rebound in U.S. bonds since July

Zhitong Finance APP noticed that as Federal Reserve Chairman Powell emphasized the importance of US inflation data, traders are betting on a rebound in the $27 trillion US Treasury market.

Daily position data since July 1st shows that traders are building bullish bets on bonds ahead of Chairman Powell's testimony to Congress and this week's release of the Consumer Price Index (CPI). If Powell's speech or Thursday's inflation data supports expectations of a rate cut this year, these bets will benefit.

Bullish sentiment is also evident in the spot market for US Treasuries, with a survey by Morgan Stanley showing that clients' long positions in various tenors of US Treasuries have risen to the highest level in two weeks.

So far this month, open interest in 10-year US Treasury futures has been increasing daily, totaling about 159,000 contracts. Open interest in September 10-year Treasury futures has risen to nearly 4.5 million contracts, the highest in the current contract cycle.

Meanwhile, the yield on 10-year US Treasuries has dropped by over 20 basis points, indicating that traders are building new long positions. Similar trends have also been seen in 2-year and 5-year Treasury futures.

This optimism slightly waned on Tuesday as Powell stated that the Fed is looking for "more good data" showing a cooling of inflation. He also noted that policymakers are aware of the risks of cutting rates too early or too late.

However, swap traders expect two rate cuts of around 25 basis points each this year, with a likelihood of about 70% for the first rate cut at the September policy meeting.

Kelsey Berro, Managing Director of Fixed Income at J.P. Morgan Asset Management, said: "The data is very clear at this point." "This gives the Fed the green light to adjust policy."

Here is an overview of the latest positioning indicators in the interest rate market:

J.P. Morgan clients increase long and short positions

In the week ending July 8th, J.P. Morgan clients' direct long positions increased by 5 percentage points to the highest level in two weeks. During the same period, full short positions also increased by 2 percentage points. Currently, short positions are at the highest level since June 10th.

Option premiums favor long-term put options

The premium paid to hedge against long bond risk still favors put options over call options, as traders pay higher prices for bond options to hedge against downside rather than upside The continued slight tilt of the front and abdomen of the curve is slightly favorable for call options, indicating that traders are paying a premium to hedge against rebounds in these maturities. Recent U.S. Treasury flow includes a bearish 10-year hedge fund aiming for a 4.4% rise in 10-year Treasury yields by July 26, as well as recent long-term volatility trades through 10-year cycle options.

Asset Management Company Net Duration Long-Term Construction

According to data from the U.S. Commodity Futures Trading Commission (CFTC), in the week ending July 2, real money accounts added 156,000 10-year U.S. Treasury futures equivalents, continuing to build net duration long positions in futures. Hedge funds expanded their net short positions by about 87,000 10-year Treasury futures. The asset management company with the largest increase in net positions this week was in 10-year and over 10-year Treasury futures, with a total risk of $10.7 million/DV01.

Active SOFR Options

In the past week, the 94.875 strike price was one of the most actively traded strike prices within the 2025 March maturity, with fund flows involving the purchase of SFRU4 94.75/94.875/95.00 call options and downside options such as SFRH5 95.00/94.875/94.6875/94.5625 put options and SFRU4 94.875/94.75/94.625 put options. The 95.1875 strike price also saw a significant increase in open interest contracts, with fund flows in the past week including the purchase of SFRZ4 95.0625/95.1875/95.3125 call options.

SOFR Options Heatmap

In the SOFR options expiring in March 2025, the 94.875 strike price now has the most open interest contracts due to a significant increase in positions through call and put options on September 24 Recent activities include buying SFRU4 94.75/94.875/95.00 call options. The 94.625 strike price also remains active, with recent activities including SFRU4 94.6875/94.625 1x2 put spreads and SFRU4 94.875/94.75/94.625 put options, as well as the recently active SFRU4 94.6875/94.625 1x2 put spreads.