Bets on Fed Rate Cuts Are Sweeping Through US Bond Market

Yahoo

06-08-2025

(Bloomberg) -- Bond traders are ramping up bets on the Federal Reserve cutting interest rates this year, as signs of a weakening US economy bolster the case for the central bank to reduce borrowing costs as demanded by President Donald Trump.
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Positioning in options tied to the Secured Overnight Financing Rate, which closely tracks the expected trajectory of US monetary policy, shows investors readying for the possibility of cuts in each of the three remaining meetings this year, bringing down rates by a total of 75 basis points in 2025. Other plays on SOFR have included bets on a 50 basis-point cut at the central bank's next meeting, in September.
Last week's soft payrolls data has made investors more confident that the Fed will cut rates to buffer US growth — a move that Trump has called for but central bank officials have so far resisted. A report on Tuesday showed that the US service sector stagnated in July, further exacerbating those worries.
'The market definitely is on edge after the July payrolls report on Friday, but there is still a lot of data to go before the September meeting,' said Molly Brooks, US rates strategist at TD Securities. 'The Fed needs more than just one data indicator and one data point in order to shift its view.'
Swaps currently price in a combined amount of easing equal to almost 60 basis points, up from around 30 basis points priced ahead of the payrolls report. Treasury yields have reflected the shift, with the 10-year yield at 4.24%, compared to a high of 4.49% last month.
'Against the backdrop of slowing growth, slowing inflation (ex-tariffs), and the Fed moving closer to easing, the direction of travel for yields will be lower over the next several months,' said Dan Carter, portfolio manager at Fort Washington Investment Advisors.
Bullish momentum is also building in the cash market, where traders have jumped into long Treasury positions. The latest survey of clients from JPMorgan Chase & Co. shows outright long wagers are at their biggest levels since April.
Meanwhile, Fed members are also showing signs of leaning toward easier monetary policy. San Francisco Federal Reserve Bank President Mary Daly said on Monday that the time is nearing for rate cuts, while Federal Reserve Governors Christopher Waller and Michelle Bowman voted against the Fed's July decision to hold its benchmark rate steady, preferring a quarter-point reduction.
Investors are also alert to news of who might replace outgoing Federal Reserve Governor Adriana Kugler, with Trump saying Tuesday that he would decide this week. It's an opportunity for the president to tap a candidate more closely aligned with his calls for the central bank to lower rates.
Here's a rundown of the latest positioning indicators across the rates market:
JPMorgan Treasury Client Survey
In the week to Aug. 4, JPMorgan clients added to the outright long Treasuries position by 5 percentage points, taking it to the highest level since April 14. The net long position is the highest since July 7. The one-week change into longs was the most since the end of March.
Most Active SOFR Options
In SOFR options across Sep25, Dec25 and Mar26 tenors over the past week there has been a large position add in the 95.75 strike with new flows including large buyer of the Dec25 96.375/96.25/95.875/95.75 put condor, the SFRZ5 95.875/95.75/95.625 put fly and SFRZ5 95.875/95.75 1x2 put spread. There has also been large buying in the 95.6875 strike over the past week via SFRZ5 95.6875/95.5625 put spreads. The past week has also been heavy liquidation in the 95.375 strike mainly via Dec25 puts and Mar26 puts.
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. Recent activity around the 95.625 strike has been buying of the SFRZ5 95.875/95.75/95.625 put fly. The main theme post Friday's jobs data has been demand for upside hedges in SOFR options, with some positions looking to target a half-point rate cut at the next September policy meeting.
Treasury Options Skew
Following Friday's jobs report, skew on Treasury options across the curve has moved to favor calls as traders pay a premium on hedging a continued bond market rally over a selloff. In the long-end, the skew on the bond option has risen to favor calls by the most since April.
CFTC Futures Positioning
In the week to July 29, a day before the Fed decision, hedge funds aggressively built net short positioning in 10-year note futures. Asset managers took the other side, adding to net longs in the tenor and added to longs in both long-bond and ultra-long bond futures.
--With assistance from Michael Mackenzie and Ye Xie.
(Updates prices throughout, adds context in ninth paragraph.)
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