On the eve of the Jackson Hole central bank annual meeting, funds are betting heavily on Powell "dovish," wagering on a "50 basis point rate cut."

On the eve of the annual Jackson Hole meeting, traders are heavily betting that the Federal Reserve will cut interest rates by 50 basis points next month.

Despite the U.S. July PPI month-on-month growth rate hitting a three-year high last week, traders' bets on a 50 basis point rate cut have not diminished at all. On Tuesday, U.S. Treasury bonds ended a three-day sell-off, with yields falling across the board, indicating that the market still tends to believe that the Federal Reserve will take action next month.

Data shows that options contracts betting on a 50 basis point rate cut in September have reached 325,000, with a premium cost of about $10 million. If the Federal Reserve cuts rates by 50 basis points as expected, these positions could profit up to $100 million.

Powell's key speech at the annual meeting on Friday will directly validate or overturn the market's expectations for monetary easing. Currently, traders are pricing in about an 80% probability of a 25 basis point rate cut by the Federal Reserve in September.

Ian Lyngen, head of U.S. interest rate strategy at BMO Capital Markets, noted in a report:

"As the market prepares for Powell's speech, we believe the biggest risk facing U.S. Treasuries is that the Fed Chair chooses to 'douse cold water' on the widely anticipated September rate cut."

Market Sentiment Shifts, Short Positions Drop to Monthly Low

Beyond aggressive options betting, broader market sentiment also shows a shift in investor positioning. JPMorgan's latest U.S. Treasury client survey indicates that investors are shifting from short positions to neutral positions.

According to data for the week ending August 18, JPMorgan clients' direct short positions fell by 4 percentage points and shifted to neutral positions. The current percentages of direct short and neutral positions are at their lowest and highest levels, respectively, since July 14. This indicates that overall bearish sentiment in the market is weakening ahead of Powell's speech.

However, this widespread dovish expectation also carries risks. Ian Lyngen warned:

"It is worth noting that if Powell does not exhibit the dovishness currently expected by the market, the front end of the yield curve could easily be impacted by a bearish correction."

Institutional Investor Positioning Diverges, Focus on Long-End Allocation

According to CFTC data, in the week ending August 12, asset management companies increased their net long positions in most bond futures, particularly in long-term and ultra-long-term bonds. Meanwhile, hedge funds increased their net short positions in 10-year Treasury futures while reducing their short positions in long-term Treasury futures.

Additionally, the skew indicator for Treasury options is also sending mixed signals. The skew for long-term bonds tends to favor put options, indicating that traders are willing to pay higher premiums to hedge against a sell-off in long-term bond futures.

However, the skew for front-end to mid-term options slightly favors call options, suggesting that traders are hedging for a rebound in this part of the curve. Overall, this reflects the market's demand for steepening the yield curve through options positioning.