The market consensuses on two interest rate cuts by the Federal Reserve this year, prompting traders to heavily bet on a rebound in US bonds

According to the Zhitong Finance and Economics APP, traders are heavily betting on the surge in US Treasury bond prices, re-entering bullish trades they fled from last week ahead of inflation data and the Fed interest rate decision.

In the past week, the demand for futures contracts benefiting from the rise in the bond market has surged significantly. From easing price pressures to weak retail sales, these economic indicators support a rate cut in the US, prompting investors to regain confidence. The market expects the Fed to cut rates twice in 2024, by 25 basis points each time, while Fed officials predict only one rate cut.

As of late last week, new long positions dominated the bond market rally. Position data shows that on Friday, the yield on the US 10-year Treasury bond fell below 4.20% for the first time since April 1.

On Tuesday, US Treasury bond prices rose as US retail sales data strengthened expectations of a decline in US borrowing costs.

Open interest contracts rose significantly. The trend of open interest contracts also aligns with short covering, as the swap market repriced two 25 basis point rate cuts within the year.

Data from the Commodity Futures Trading Commission (CFTC) supports a similar trend, as asset management companies have been heavily closing out futures short positions linked to overnight financing rates ahead of the inflation data release last Wednesday. For the first time since early July 2023, they have switched to a net long position.

Here is an overview of the latest position indicators in the interest rate market:

JP Morgan Clients Bullish

For the week ending June 17, JP Morgan's survey of US Treasury clients showed a 6 percentage point increase in long positions, pushing all clients' net long positions to the highest level since May 20. Short positions decreased by 2 percentage points, and neutral positions decreased by 4 percentage points.

Option Premiums Approaching Neutral

After hedging against the rise in US Treasury bonds, premiums rose to the highest level of the year last weekend, but as yields remained near last week's lows, this deviation has fallen back to near neutral levels.

The decline in call option premiums benefited from traders closing out futures long positions, which seemed to be the driving force behind Monday's selling. Notable recent US Treasury bond option trades include a large sale of $30 million in premium for September put options on 10-year bonds, a new position reported in Tuesday's open interest report.

Net Long SOFR Futures

According to CFTC data as of June 11th, asset management companies have taken an optimistic stance, increasing net long positions in two-year to ultra-long bond futures, equivalent to 140,000 10-year US Treasury futures contracts. In SOFR futures, asset management companies face a risk increase of approximately $8.2 million per basis point, turning net long for the first time since July 4th. At the same time, hedge funds have closed out net short positions in US Treasury futures, equivalent to about 95,000 10-year US Treasury futures contracts.

Active SOFR Options

The top three exercised trades in the past week, as of March 25th, were the SOFR December 24th 95.1875/94.9375/94.6875 bear put spread contracts, which were heavily bought into last Friday.

SOFR Options Heatmap

Among SOFR options as of March 25th, the most active contract had a strike price of 96.00, equivalent to a 4% interest rate. Major trades included the SOFR March 25th 96.00/95.50/95.00 and SOFR September 25th 96.75/96.00/95.25 bear put spread contracts. Popular trades recently also included the SOFR December 24th 96.00/97.00 bull call spread contract.