Without fear of falling profits, bond shorts in the US strengthen expectations for a rate hike with strong non-farm payrolls.

Even though some extreme positions have been reduced, bond traders are still betting on a rise in US bond yields, as key US employment data to be released on Friday may further support the Fed's rate hikes. Recently, due to rising oil prices and inflation above target levels, short positions have dominated the US bond market, leading to a sharp spike in benchmark yields, with traders betting on a Fed rate hike this year. Although the market is hopeful for US-Iran negotiations, traders remain cautious and defensive. The yield on the 10-year US Treasury bond has fallen from a peak near 4.69% two weeks ago to below 4.5%, but still remains well above earlier lows this year. US bank strategists wrote in their latest weekly report that "market positions still lean towards short." They added that even with some weakening momentum, yields still tend to rise. In this context, the US non-farm payroll data will be released on Friday. The market expects steady job growth in May, with an unemployment rate of 4.3%. If the data exceeds expectations, it could further strengthen the confidence of short sellers in US bonds; if the data falls below expectations, it could trigger short covering and boost bond prices. Data released on Tuesday showed job openings far exceeding economists' expectations, indicating strong momentum in the job market, the latest evidence of the job market stabilizing since the beginning of the year. In the past week, traders in the US Treasury options market have been hedging their positions. Notable trades include a $16 million position with a target price for the 10-year Treasury yield to reach 4.4% by the end of the month; and another large position betting on the 10-year Treasury yield rising above 5%, reaching a new high since October 2023. In the spot market, Morgan Stanley's survey of US Treasury clients showed minimal changes, with investors adjusting a small amount of long positions to neutral. The CME's "FedWatch" tool shows that the market is pricing in a 70% probability of a Fed rate hike by the end of the year. Listed below are the latest position indicators for the interest rate market: Morgan Stanley US Treasury Client Positions Survey As of the week ending June 1, investors reduced their long positions by 2 percentage points, moving to neutral positions, which increased by the same amount. Short positions remained unchanged for the week, but net long positions decreased by 2 percentage points. Secured Overnight Financing Rate (SOFR) Options Positions In options expiring on June 26, September 26, and December 26, a significant increase in open contracts at the 96.375 strike price was seen, mainly due to an increase in call options expiring on December 26. Recent fund flows include buying SFRZ6 96.3125/96.375/96.4375 call options. At the same strike price, there was a significant amount of closing activity in put options expiring on September 26. Contracts at the 96.7375 strike price were also active, with recent fund flows including buying SFRU6 96.4375/96.5625/96.6875 call options. In options expiring on June 26, September 26, and December 26, the contracts with the 96.50 strike price had the largest open interest. Contracts with the 96.3125 strike price also had considerable open interest, with the number of open contracts increasing in recent weeks. Fund flows included buying SFRU6 96.3125/96.4375/96.5625 call options. Additionally, in the past week, there was an increase in trading volume for contracts at the 96.375 strike price, including buying SFRZ6 96.3125/96.375/96.4375 call options. US Treasury Option Premiums In the past week, premiums paid for put options to hedge against long-term US Treasury risks remained heavily skewed towards put options, especially as the 30-year yield continues to fluctuate around 5%, further widening the protective put option premiums. Option premiums for other maturities also leaned towards put options, but to a lesser extent.