Mounting Bets on Extended US Bond Rally Face Jobs-Data Reckoning

Bond traders who rapidly built up long Treasuries positions in recent weeks are counting on Thursday’s jobs report to give the market rally more room to run.

June’s payrolls report, the next major risk event for the bond bulls, is set for release just one day before the Fourth of July holiday. Bullish bond investors have already faced a mini-gut check after Tuesday’s JOLTS job openings report showed an unexpected, steep increase for May — a sign of labor market strength that ignited a bond market selloff.

“The persistent long build continues in USTs,” Citi strategist David Bieber said in a note, adding that tactical positioning is now “highly extended one-sided” after the build-up of bullish positions over the past week.

That can be seen in Treasury futures, where CME open interest data shows traders adding to positions into the recent bond market rally, with newly established long positions fueling the recent move lower in yields. In US 10-year note contracts, open interest has climbed extensively over a period when 10-year yields have dropped from above 4.4% to Tuesday’s 4.185% lows. In two-year note futures, open interest has risen over the past 10 consecutive sessions.

The bullish momentum in the Treasury futures market is also playing out in options. On Monday, a whopping $32 million of premium was spent on an option targeting a further rally in 10-year notes.

At the same time, the one-sided long position in the Treasuries market leaves price action open to potential profit squeezes, as traders may look to unwind should US labor market conditions fail to justify a Federal Reserve interest-rate cut as soon as next month.

The market “is a bit long front-end, with July cut about 20% priced-in after recent language from Bowman and Waller,” said Ed Al-Hussainy, global rates strategist at Columbia Threadneedle Investment. “The risk is this will fall to zero if employment surprises to the upside — say NFP close to 200,000,” he added, referring to the employment report’s nonfarm payrolls component.

As such, there’s still demand for hedging activity around potentially higher yields. Tuesday’s action in the Treasury market includes one position looking to hedge a 10-year yield rebound to around 4.3% by the end of Thursday’s session.

Meanwhile in the cash market, there are also footprints of growing long positions, as seen in Tuesday’s JPMorgan Treasury client survey which shows outright long positions climbed to the most in two weeks.

Here’s a rundown of the latest positioning indicators across the rates market:

JPMorgan Treasury Client Survey

In the cash market, JPMorgan Chase & Co.’s Treasury client survey for the week to June 30 showed long positions rise two percentage points, switching out of neutral with shorts unchanged. The outright long position is now most elevated in two weeks.

Most Active SOFR Options

In SOFR options across the Sep25, Dec25 and Mar26 tenors, there was a large amount of new risk seen in the 96.1875 strike with flows around the level including buyer of SFRZ5 96.0625/96.1875/96.3125 call flies. There was also heavy activity seen over the past week in the 95.625 strike mainly due to large buying in the SFRU5 95.75/95.625 1x2 put spread trade.

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 flows in SOFR options have included hedges against multiple rate cuts this year via December upside structures.

Treasury Options Skew

Over the past couple of weeks, Treasury options skew has moved toward favoring calls across the strip, signaling traders are now paying a premium to hedge against a bigger bond rally versus a selloff, from the front-end out to the long-end of the curve. In Treasury options, stand out flows on Monday included a $32 million premium call buyer in September tenor.

CFTC Futures Positioning

Hedge funds saw a heavy amount of short covering in US 10-year note futures in the week up to June 24, latest CFTC data shows. Elsewhere, asset managers liquidated net longs in 10-year note futures, while adding to duration long in ultra 10-year note futures. Largest positioning shift over the week saw hedge funds cover around $6.9m/DV01 to net short position in 10-year note futures.

With assistance from Anya Andrianova.

This article was generated from an automated news agency feed without modifications to text.

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