Bond traders now think 10-year Treasury yields will fall below 4%

by Edward Bolingbroke

Traders are ramping up options wagers that 10-year Treasury yields are poised to sink to the lowest since April, amid dovish comments from Federal Reserve officials and a backdrop of simmering Mideast tensions.

The focus of the bets, which have drawn at least $38 million in premiums across Friday and Monday, has been around August calls on US 10-year options. The positions hedge against a drop in 10-year Treasury yields to 4% in the coming weeks, from roughly 4.3% now. 

Such a tumble would bring them to the lowest since the market turmoil that followed President Donald Trump’s April 2 announcement of unexpectedly steep tariffs on US trading partners. It would also mark a sharp reversal from peak levels above 4.6% seen in May, when mounting worries around government spending in the US and other major economies sent long-term yields soaring.

A big impetus for the bullish hedges came from Fed officials, including Governor Christopher Waller and Vice Chair for Supervision Michelle Bowman, appearing to support an interest-rate cut as early as July. Chair Jerome Powell reiterated that patience on additional easing is still warranted in congressional testimony on Tuesday, but he said cuts would come “sooner rather than later” if inflation pressures remain contained. 

Treasuries steadied on Wednesday ahead of Powell’s second day of testifying before the Senate Banking Committee. Yields on two-year tenors traded at 3.79%, the lowest level in seven weeks. 

Traders have been building bets on additional rate cuts into the front end of the curve. Swaps are now pricing around four basis points of easing into the July Fed meeting, compared with near zero before Bowman spoke, and a combined 60 basis points over the remaining four gatherings this year, up from 45 basis points a week ago. 

A surprisingly weak reading on consumer confidence on Tuesday supported the options positions, pushing 10-year yields below 4.3% to the lowest since early May.

The bulk of activity in the options bets was seen Friday and Monday, when yields tumbled before Trump’s evening announcement of a ceasefire between Iran and Israel following more than a week of conflict. 

Open interest, or the amount of new risk, has surged since Friday in the August 10-year call options. On Monday, one trade cost a premium of roughly $10 million for the 113.00 strike, which is equivalent to a yield of about 4%. Recent open interest data has shown the buying since Friday to be new risk, rather than covering existing positions. 

Treasury Options Traders Target 10-Year Rally via August Calls 

Here’s a rundown of the latest positioning indicators across the rates market:

JPMorgan Treasury Client Survey

In the cash market, JPMorgan Chase & Co.’s Treasury client survey for the week to June 23 showed outright long positions fell 4 percentage points, shifting into neutrals. The all-client survey now shows the smallest net long position in three weeks. 

Most Active SOFR Options

In SOFR options across the Sep25, Dec25 and Mar26 tenors, there were some large positions formed around the 95.6875 strikes where both Sep25 and Dec25 puts proved popular. Flows over the week included large buying of the SFRU5 95.6875/95.625 1x2 put spread, the SFRU5 95.75/95.625 put spread and the SFRZ5 95.375/95.625 put spread. 

SOFR Options Heatmap

The 95.625 strike remains most popular across Sep25, Dec25 and Mar26 options, with a large amount of risk seen in the level via Sep25 puts and Dec25 puts. Other populated strikes include 95.75 and 95.875, where Sep25 puts are prominent. On Monday, there appeared to be a wave of position unwinds via sellers of multiple downside structures across Sep25 and Dec25 1-year mid-curve structures, following the dovish comments officials including the Fed’s Bowman. 

Treasury Options Skew

Treasury options skew now favors calls across the strip, signaling traders are now paying a premium to hedge against a bigger bond rally versus a selloff, from the front-end out to the long-end of the curve. Long-bond skew is now favoring call premium for the first time since April. In 10-year options, demand over recent sessions has emerged for upside protection targeting a move in 10-year yields down to near 4% level via August call structures. 

CFTC Futures Positioning

Net duration long positions among asset managers continued to rebuild in Treasury futures, CFTC data through June 17 shows. Over the week, asset managers added to net long positioning across 2-year, 10-year and ultra 10-year note futures by a combined $14.5m/DV01. Hedge funds added to net short position in 10-year note futures by around $4.9m/DV01, while covered a combined $4.6m/DV01 in net short positioning across long-bond and ultra-long bond futures. 

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