The market bets that Trump may appoint a "dovish" Federal Reserve chairman, with bullish tendencies observed in U.S. Treasury options

According to Zhitong Finance APP, as the market speculates that Trump may ultimately appoint a "dovish" successor to replace current Federal Reserve Chairman Jerome Powell, there has been a noticeable bullish trend in the U.S. Treasury options market. Over the past week, the benchmark Treasury yield has retreated from previous highs, and changes in options trading reflect a subtle shift in investor sentiment.

Earlier reports indicated that Trump was preparing to replace Powell, planning to appoint a new chairman who is more inclined to cut interest rates quickly. This rumor once pushed the 30-year Treasury yield to 5.07% on July 16, reaching a new high since May.

However, the White House subsequently stated that the president has no intention of replacing Powell before the end of his term (which will expire in May next year). This statement alleviated market concerns, leading to a "soft rebound" in long-term Treasuries that had previously been sold off due to fears of inflation resurgence.

Powell has clearly stated that before considering interest rate cuts, he will assess the actual impact of Trump's new round of tariff policies on the economy. His cautious stance adds uncertainty to the market, prompting investors to turn their attention to the Federal Open Market Committee (FOMC) interest rate decision on July 30 for more policy clues.

It is noteworthy that Federal Reserve Governor Christopher Waller recently rare suggested that a rate cut should occur in July, increasing attention on the internal disagreements within the Federal Reserve.

Against the backdrop of falling interest rates, the risk premium for 30-year Treasury put options has decreased. Earlier market concerns about rising yields led to a strong preference for put options, causing the "skew" of options to reach an extreme level rarely seen in the past year. As yields fell to around 4.9% on July 22, this skew phenomenon began to ease, indicating that investor concerns about further significant declines have lessened.

Meanwhile, the 10-year Treasury futures market has seen a large number of bullish bets. On Monday and Tuesday, approximately 54,000 September call option contracts were traded, with a total premium of about $23 million. These contracts bet that the 10-year yield will fall to around 4.25% by August 22, while the current yield is about 4.34%.

A JP Morgan client survey indicated that in the week ending July 21, both long and short positions in U.S. Treasuries among the bank's clients increased, while the proportion of neutral positions decreased, showing a more polarized market stance. Overall net long positions have slightly decreased.

According to data from the Commodity Futures Trading Commission (CFTC), as of the week ending July 15, asset management institutions have reduced their net long positions in most U.S. Treasury futures contracts, particularly across various maturities from 5-year to ultra-long-term bonds (Ultra Bond). Specifically, for every 0.01% (one basis point) fluctuation in market interest rates corresponding to these reductions, the total change in the market value of the positions amounts to approximately $164 million. In particular, the reductions in Ultra 10-year and standard 10-year Treasury contracts are the most pronounced, with sensitivities to a one basis point interest rate change equivalent to approximately $50 million and $40 million in position value, respectively.

At the same time, leveraged funds have begun to cover their short positions in 10-year Treasury bonds, with the scale of the cover corresponding to a one basis point change in interest rates resulting in a decrease of approximately $56 million in the value of related positions, indicating that some speculative funds are shifting towards a more neutral operating strategy