Bullish options trading on U.S. Treasuries rises as traders bet on a decline in the 10-year Treasury yield to 4%

Against the backdrop of the Federal Reserve releasing dovish signals and the easing situation in the Middle East, traders in the U.S. Treasury market are accelerating bets that the 10-year Treasury yield will fall to 4%.

According to media reports, traders invested at least $38 million just last Friday and Monday to purchase call options on 10-year Treasuries expiring in August, betting that the yield will drop from the current approximately 4.3% to 4%, which would be the lowest level since April of this year.

Currently, the swap market expects the probability of a Fed rate cut in July to rise from nearly 0% to 40%, with the total expected rate cut across the remaining four meetings of the year increasing from 45 basis points a week ago to 60 basis points.

Statements from Federal Reserve officials have been a key factor driving this bet. As previously mentioned by Wall Street Insights, Fed Governor Christopher Waller and Michelle Bowman have indicated that a rate cut could occur as early as July. Jerome Powell also stated during a congressional hearing on Tuesday that a July rate cut cannot be ruled out.

Additionally, the unexpectedly weak consumer confidence data for June released by the U.S. on Tuesday further supported these options positions, with the 10-year Treasury yield briefly falling below 4.3%, reaching its lowest level since early May.

Rate Cut Expectations Heat Up, Options Market Sees Betting Frenzy

Relevant data shows that since last Friday, open interest in call options on 10-year Treasuries expiring in August has surged, indicating new risk rather than closing existing positions.

On Monday, a trade with an option premium of $10 million locked in a strike price of 113.00, which corresponds to a Treasury yield of about 4%.

On Monday evening, according to CCTV News, Trump announced a ceasefire agreement between Iran and Israel. This news also somewhat boosted safe-haven demand, leading to further declines in yields during that day's trading.

The skew of Treasury options is now leaning towards call options, especially long-dated options, with the skew favoring call options for the first time since April. This indicates that investors are positioning themselves in anticipation of a potentially larger bond rally.

Market Positioning Changes, Long-Short Battle Intensifies

In the broader interest rate market, traders' position adjustments reflect a divergence in future outlooks.

According to a client survey by JPMorgan, as of the week ending June 23, net long positions fell by 4 percentage points, with some funds shifting to a neutral stance, bringing the overall net long position to a three-week low.

Meanwhile, CFTC data shows that asset management companies' net long positions in Treasury futures continue to rebound, with net long positions in 2-year, 10-year, and over 10-year futures cumulatively increasing by $14.5 million/DV01 (indicating that if yields fall by 1 basis point, the long position appreciates by $14.5 million; conversely, it depreciates by $14.5 million).

However, hedge funds have generally increased their short positions in Treasury futures, adding approximately $4.9 million in net short positions in 10-year Treasury futures, while unwinding about $4.6 million/DV01 in net short positions in long and ultra-long Treasury futures Risk Warning and Disclaimer

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