The impending impact of tariff growth, traders bet on a rebound in the bond market.

Facing the potential economic slowdown, bond traders, after weeks of watching and remaining neutral, began to bet on a sharp rebound in the bond market for hedging purposes. In the past week, US Treasury bond prices surged, and yields plummeted. Concerns over the weakening signs of the US economy and the pressure from Trump's tariff policies led to options traders adjusting their positions. The 10-year Treasury yield fell to a new low for the year on Tuesday, dropping from 4.57% a week ago to 4.28%. Ian Lyngen, head of US rate strategy at BMO Capital Markets, stated in a report, "As market concerns over President Trump's policies affecting global economic performance escalate, the market is showing a flight to safety sentiment." Just a day after Trump confirmed that tariffs on Canada and Mexico will go into effect next week, US Treasury Secretary Scott Bessent stated at an event in Washington on Tuesday that Trump's policies would naturally lower the 10-year Treasury yield, further fueling bullish bets in the bond market. A notable trade occurred on Tuesday morning, betting on the 10-year Treasury yield to drop to 4.15% or lower. Approximately $60 million was invested in this trade. If the yield drops to 4%, the trade could profit by around $40 million; if the yield dips back to its September low, the position could accumulate a substantial profit of around $280 million. Derivatives traders are also focusing on short-term Treasury bond yields. Federal Funds futures' long positions have been increasing in the last few trading days. These long positions could benefit if the Fed cuts rates at its policy meeting on May 7th. Since the beginning of last week, the open interest in the May contract has grown by over 50%, as traders expect further monetary policy easing from the Fed this year. Currently, the Fed Funds rate futures market is predicting a 32% chance of a rate cut in May, up from only 8% a week ago. The relative certainty around the Fed's policy outcome this week has helped keep Treasury yields within a narrow range. In the spot market, traders are also turning more optimistic with bullish positions. A survey by J.P. Morgan of its US Treasury clients showed that net long positions reached their highest level since January 27th as of the week ending February 24th. Here are the latest position indicators in the rate market: 1. J.P. Morgan US Treasury client survey: As of the week ending February 24th, the survey showed J.P. Morgan's US Treasury clients increasing direct long positions by 3 percentage points, pushing net client positions to their highest level since January. Direct short positions decreased by 1 percentage point that week, while neutral positions dropped by 2 percentage points. 2. US Treasury options premium: Over the past week, the cost of hedging with US Treasury options (i.e., option premium) has continued to increase, leading more traders to pay higher costs to hedge against rising risks in long-term Treasury bonds. The premium has risen to its highest level since August. The skew between put and call options for long-term Treasury futures has been steadily increasing, with call options being favored, highlighting this trend. On Monday, there was a significant trade in options, hedging against 10-year Treasury yields to drop to around 4.2% by March 7th. Selling straddle options and butterfly options has become another popular trading strategy recently. Before the $60 million wager on 10-year Treasury yields dropping to around 4.15% earlier, a $5.3 million straddle option selling trade was seen in the market. 3. Most active Secured Overnight Financing Rate (SOFR) options: Over the past week, the open interest in two SOFR options has surged, with both 2025 September expiry options at strike prices of 96.50 and 96.25 surpassing 100,000 contracts. A significant flow of trades recently has been the continuous increase in put option hedge positions. By directly purchasing call options with a strike price of 96.25, traders are betting on multiple rate cuts by the Fed in mid-2025. As of Monday's close, this position has accumulated around 110,000 contracts. The price of the 2025 September SOFR call options has been increasing due to recent investors buying that option and selling call options with a strike price of 97.00 in December 2025, engaging in a spread trade. 4. SOFR options heat map: In the 2025 September expiry SOFR options, options with a strike price of 96.00 remain the most active contracts. Recent trading activity also saw an increase in options with a strike price of 95.875. Market participants have shown considerable buying interest in the put fly options (put fly) for the September 25, 2025, SOFR options with strike prices of 95.875/95.625/95.375. 5. Commodity Futures Trading Commission (CFTC) futures positioning report: The CFTC data as of February 18th showed hedge funds actively unwinding their short positions in 10-year Treasury futures, covering a risk exposure equivalent to around $10.3 million in DV01. Hedge funds closed out a total of around 340,000 contracts of net short position across all futures contracts, the largest scale seen since November. In the same week, asset management firms reduced their net long positions in 10-year Treasury futures by around 151,000 contracts, with the largest reduction in net longs seen in 5-year Treasury futures.