Harris leads Trump? Bullish bets in the options market surge, and long positions in government bonds reach a three-month high

According to the Zhitong Finance APP, as polls show U.S. Vice President Kamala Harris gaining an advantage in a potential showdown with former President Donald Trump, there has been a noticeable trend of short-term bullish bets in the U.S. options market recently. Traders are actively adjusting their positions in preparation for a possible victory by Harris while reducing their bets on Trump winning. The futures market also reflects this shift in sentiment, with net long positions in U.S. Treasuries reaching their highest level in three months, indicating market uncertainty about the election outcome and preparation for potential market volatility.

Figure 1

The changes in polling have prompted traders to reassess their investment strategies. Bearish positions originally established based on expectations of a Trump victory are being adjusted, as Trump's proposed tax cuts and aggressive tariff agenda are seen as likely to push up yields and trigger inflation. However, as the campaign becomes gridlocked, investors are beginning to prepare for the possibility of an opposite election outcome.

Ian Lyngen, head of U.S. interest rate strategy at BMO Capital Markets, noted that the volatility in polls and forecasts has made this election one of the closest in years, and the election process is expected to be fraught with twists and turns.

Data from the Chicago Mercantile Exchange (CME) shows that on Monday, the number of bullish options was four times that of bearish options, including a $5 million position targeting a drop in the 10-year Treasury yield to around 3.9%, below Tuesday's 4.28%. Fund flows also indicate an exit from bullish and bearish bets, with bearish bets targeting higher yields.

On Tuesday, demand for bullish hedges continued, targeting a 10-year yield below 4%. In the futures market, new long bets emerged on Monday, particularly with significant demand for longer-term bonds.

While traders are preparing for potentially undecided election outcomes, they are also closely monitoring economic signals ahead of Thursday's Federal Reserve policy meeting. A report on Tuesday showed strong performance in the services sector, leading to a rise in the yield on the U.S. two-year bond, which is sensitive to Fed policy.

The market widely expects the Fed to cut the benchmark interest rate by a quarter of a percentage point this week, but the uncertainty surrounding economic and political conditions has heightened expectations for increased volatility in the near term, with a bond volatility index rising to its highest level in over a year on Monday.

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

JP Morgan Survey

The results of the JP Morgan survey show that as of the week ending November 4, there has been a significant change in client positions in U.S. Treasuries. Specifically, direct long positions have increased, while short positions have decreased accordingly, pushing net long positions to their highest level since August 12.

Most Active SOFR Options

In the most active SOFR options, the changes in open interest for expirations such as December 24, March 25, and June 25 have remained relatively stable over the past week. However, it is noteworthy that the open interest at the strike price of 96.375 has seen the most significant increase, with a large influx of funds involving the purchase of SFRM5 96.375/96.125/95.75 put options. Additionally, the strike price of 95.5625 has also been favored, with recent fund inflows including trades in SFRZ4 95.75/95.6875/95.625/95.5625 put options.

Figure 2

SOFR Options Heatmap

From the SOFR options heatmap, the SOFR options with a June 2025 expiration have seen the strike price of 95.75 gain attention due to recent demand for both put and call options expiring on December 24, making it the most popular choice. Meanwhile, the strike price of 95.50 has also maintained its popularity, with significant increases in both call and put options for the December 24 expiration.

Figure 3

CFTC Futures Positions

Data shows that as of the week ending October 29, asset management companies increased their net long positions in 10-year Treasury futures by approximately 182,000 equivalents. In contrast, hedge funds increased their net short positions in 10-year Treasury futures by about 86,000 during the same reporting period. Notably, the position changes for asset management companies in 5-year Treasury futures were the most significant, with each basis point increase in risk leading to an increase of $8.7 million in net long positions.

Figure 4

Bond-Put Option Premiums Fall to Neutral Levels

Finally, regarding bond-put option premiums, although the premiums for hedging long-term bond sell-offs remain high compared to shorter-term bonds, they have recently retreated from their peak levels and are approaching neutral levels. This trend reflects an increase in demand for call options among traders in the first half of this week, as they seek to establish new positions to hedge against a potential rebound in the bond market

Figure 5