Trump's tariff policy suddenly changes! The downward trend in US bonds is easing, and traders are quickly switching from short to long positions.

Some bond traders began to bet that the relentless selling of US Treasury bonds would soon lose its momentum, partly due to uncertainties surrounding the policies of the incoming US President Trump. Traders have been increasing options bets, believing that yields will fall from the 14-month high reached after last Friday's strong US jobs report. The jobs report last Friday broke market expectations of further rate cuts by the Fed. A notable trade on Tuesday, with a premium of over $40 million, aimed to bet that the 10-year Treasury yield will fall from around 4.8% to 4.6% by February 21. The next key data will be released on Wednesday, when the latest Consumer Price Index (CPI) will be announced, which is expected to show persistent high inflation. Since early December last year, US bonds have been falling, pushing the 10-year Treasury yield up from around 4.15%, as there were signs of resilience in the US economy, and speculation that Trump's economic agenda would stimulate faster growth. Some also fear that his tariff plan will reignite inflation. However, a report on Monday suggested that Trump's new government might gradually implement tariffs, indicating that the impact of inflation might weaken, providing a brief boost to US Treasury bonds. The report clearly indicated the uncertainty investors face in terms of policy mix under Trump's leadership. On Tuesday, the bond market also received temporary support from a Producer Price Index (PPI) report that came in lower than expected. All the lingering questions about the year ahead have prompted bond investors such as PIMCO to predict potentially significant returns in the future, while the renowned bear RBC BlueBay Asset Management stated that it might be time to take some chips off the table. The latest client survey by J.P. Morgan shows that bullish sentiment in the spot market is increasing, with long positions reaching their highest level in over a year, while short positions have decreased. Meanwhile, in options related to Secured Overnight Financing Rate (SOFR) closely tied to the Fed's expected policy trajectory, some traders are betting on a milder outlook than the current market consensus. Swaps markets predict a further 25 basis point cut in the current policy cycle, but the target for trading this week is for at least two more rate cuts this year. Here is an overview of the latest position indicators in the interest rate market: J.P. Morgan U.S. Bond Client Survey In the week ending January 13th, J.P. Morgan clients' direct long positions increased by one percentage point, reaching the highest level since December 2023, while direct short positions decreased by two percentage points. Net long positions are currently at the highest level since November 4th. US bond option premiums favor put options The cost of hedging against long-term bond sales continues to be higher than the front-end and bellies of the curve. The option skew favoring put options in long-term bond contracts is still close to this year's high. This trend is consistent with the rise in US bond yields after the jobs report last Friday, which saw yields rise, once again making the 5% 10-year Treasury yield a focus for traders. SOFR Options Trading In the past week, there has been a significant increase in new risks in contracts with a strike price of 95.6875, including a significant upside structure for the June 25th options, buying SFRM5 96.0625/96.1875 call spread and selling SFRM5 95.6875/95.625 put spread. Contracts with a strike price of 95.5625 have also been active in the past week, with trades including buying SFRH5 96.125/96.375 call spread and selling SFRH5 95.5625 put option. There have also been extensive trades around the contract with a strike price of 95.75, with recent trades including buying SFRZ5 95.75/95.625/95.50 put options. SOFR Options Heatmap In SOFR options expiring on September 25th, the most traded contract has a strike price of 96.00, mainly due to a large number of call options in March 25th and put options at that level on June 25th. Recent trades around this strike price also include buying SFRZ5 96.00/96.50/97.00 call options, while SFRH5 96.00/96.25/96.50 call options are also popular. For new risks, buying of the SFRM5 96.00-96.25 call spread has been observed in the past week. CFTC Futures Positioning Data from the Commodity Futures Trading Commission (CFTC) as of January 7th shows that hedge funds significantly reduced their short positions in the entire futures market, with the risk size equivalent to approximately 263,000 10-year Treasury futures contracts. This was the largest reduction of shorts since late November last year. On the other hand, asset management companies closed out net long positions in around 125,000 10-year Treasury futures contracts.