The U.S. Treasury market is poised for action as traders bet that yields will continue to decline
Bond traders are actively preparing for a new round of increases in the U.S. Treasury market, expecting yields to continue to decline. A JPMorgan survey shows that clients have increased their long positions in U.S. government bonds to a one-year high, reflecting a shift in market sentiment towards optimism. The statement by Federal Reserve Governor Waller supporting interest rate cuts has further boosted market confidence, leading to a significant increase in trading volume. Although some traders had previously bet on a potential market decline, current market sentiment has clearly shifted to optimism. The market is focused on the speech by Federal Reserve Chairman Powell and the monthly employment report
Zhitong Finance APP learned that bond traders are actively preparing for a new round of increases in the U.S. Treasury market, expecting yields to continue to retreat from the highs following Donald Trump's victory. The latest survey released by JPMorgan shows that its clients have significantly increased their long positions in U.S. government bonds to a one-year high, marking a shift from a neutral stance to a bullish position. This change follows the rise in U.S. Treasury prices over the past two weeks, driven by strong demand exhibited in Treasury bond auctions.
Figure 1
In the futures market, traders are reflecting optimistic expectations for interest rate declines by establishing new positions linked to the secured overnight financing rate and the federal funds rate. The statement by Federal Reserve Governor Christopher Waller, indicating a preference to support interest rate cuts at the December 18 meeting, further boosted market sentiment and led to a significant increase in trading volume. The swap market predicts a two-thirds chance that the Federal Reserve will cut rates at that meeting.
Signs of restored market confidence are also reflected in trading activity, as traders are emerging from the shadow of sell-offs caused by inflation concerns and a potential slowdown in interest rate cuts due to Trump's tax and tariff plans. Although some traders had bet on a potential market downturn last week and hedged against the risk of a rebound in 10-year U.S. Treasury yields, current market sentiment has clearly shifted to optimism.
This week, speeches by Federal Reserve Chairman Jerome Powell and the monthly employment report will be the focus of market attention, as these events may impact existing market bets. Below is an overview of the latest positioning indicators in the interest rate market:
JPMorgan Financial Client Survey
In the week ending December 2, JPMorgan's clients increased their directly held long positions by 6 percentage points, moving away from a neutral stance, while short positions remained unchanged. The direct long positions of all clients climbed to the highest level since December 11, while net long positions also reached the highest level since November 4.
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Treasury Option Premium Returns to Neutral
In the past week, the cost of hedging against bond market volatility has tended toward equilibrium. Following a surge in demand for bearish bets at the end of November, the demand for downside protection against rising 10-year U.S. Treasury yields has eased in the most recent week.
 options trading, traders expressed their expectations for a market rise by buying call spreads and call options. At the same time, the heat map of SOFR options shows active trading of call and put options at specific strike prices.
In the past week, the market showed strong interest in SOFR options expiring on December 24, particularly for options with a strike price of 95.625. The demand for call options at this strike price has been steadily increasing, reflecting a strong demand for price upside protection. Recent trading dynamics include the purchase of SOFR December 24 call spreads at 95.625/95.6875, as well as the purchase of call options at 95.5625/95.625/95.6875, and the buying of call spreads at 95.625/95.6875.
CFTC Futures Positions
In the week ending November 26, hedge funds significantly reduced their short positions in the U.S. Treasury futures market, with a specific buyback amount of approximately 417,000 equivalent 10-year U.S. Treasury futures, marking the largest net short covering since August 27. During the same period, asset management companies massively closed long positions, with a closing volume of about 265,000 equivalent 10-year U.S. Treasury futures, which is also the largest long liquidation since August 27.
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