The impact of tariff increases is imminent, traders are betting on a rebound in the bond market

According to Zhitong Finance APP, in the face of a potential economic slowdown, bond traders have begun to bet on a significant rebound in the bond market after weeks of waiting and maintaining a neutral stance, in order to hedge. In the past week, U.S. Treasury prices soared, and yields fell sharply. Due to signs of weakness in the U.S. economy and the pressure from Trump's tariff policies, options traders have adjusted their positions. The yield on the 10-year Treasury bond fell to a new low for the year on Tuesday, dropping from a level of 4.57% a week ago to 4.28%. Ian Lyngen, head of U.S. interest rate strategy at BMO Capital Markets, noted in a report: "As concerns about President Trump's policies impacting global economic performance continue to escalate, the market is exhibiting risk-averse sentiment." The day after Trump confirmed that tariffs on Canada and Mexico would take effect next week, U.S. Treasury Secretary Scott Bessent stated at an event in Washington on Tuesday that Trump's policies would "naturally" lower the yield on the 10-year Treasury bond, further fueling bullish bets in the bond market. On Tuesday morning, a notable trade emerged, betting that the yield on the 10-year Treasury bond would drop to 4.15% or lower. According to Bloomberg, approximately $60 million was invested in this trade. If the yield falls to 4%, this trade is expected to profit about $40 million; if the yield tests the September low again, this position could accumulate about $280 million in substantial profits. Derivatives traders are also focusing on short-term Treasury yields. In the past few trading days, long positions in federal funds futures have been increasing. If the Federal Reserve cuts interest rates at the policy meeting on May 7, these long positions will benefit. Since the beginning of last week, the number of open contracts for the May contract has increased by over 50%, as traders expect the Federal Reserve to further ease monetary policy this year. Currently, the federal funds futures market estimates the probability of a rate cut in May to be about 32%, up from just 8% a week ago. Until this week, the uncertainty surrounding the Federal Reserve's policy outcomes kept Treasury yields within a narrow range. In the spot market, traders have also begun to shift towards a more optimistic long position. A survey by JP Morgan of its U.S. Treasury clients showed that as of the week ending February 24, net long positions rose to the highest level since January 27. Here is an overview of the latest positioning indicators in the interest rate market: JP Morgan U.S. Treasury Client Survey: As of the week ending February 24, the JP Morgan U.S. Treasury client survey showed that direct long positions increased by 3 percentage points, pushing net client positions to the longest level since January. During the week, direct short positions decreased by 1 percentage point, and neutral positions fell by 2 percentage points. U.S. Treasury Options Premium: In the past week, the cost of hedging U.S. Treasury options (i.e., options premiums) has continued to widen, leading more traders to be willing to pay higher costs to hedge against the risk of rising long-term Treasury bonds, with premiums reaching the highest level since August. The put/call skew of long-term Treasury futures has continued to rise, with call options favored, highlighting this trend. On Monday, a significant trade occurred in the options market, hedging the 10-year Treasury bond with the goal of bringing the yield down to around 4.2% by the expiration on March 7 Recently, selling put options and straddle options to express expectations of a decline in U.S. Treasury volatility has become another popular trading strategy. Following a $60 million bet on Tuesday that the 10-year Treasury yield would drop to around 4.15%, a $5.3 million straddle option sell trade occurred in the market on Monday. Most active Secured Overnight Financing Rate (SOFR) options: In the past week, the open interest for two SOFR options surged significantly, specifically call options expiring in September 2025 with strike prices of 96.50 and 96.25, each exceeding 100,000 contracts in open interest. Recently, a notable trading flow has been the continuous increase in put hedging positions. By directly purchasing call options with a strike price of 96.25, a long position has been established, betting on the Federal Reserve to implement several rate cuts by mid-year. As of Monday's close, this position has accumulated to approximately 110,000 contracts. The price of the September 2025 SOFR call options has risen, attributed to recent investor purchases of this option and selling of the December 2025 call options with a strike price of 97.00, engaging in spread trading. SOFR options heat map: Among the SOFR options expiring in September 2025, the option with a strike price of 96.00 remains the most actively traded contract. Recently, trading activity for the option with a strike price of 95.875 has also increased. Recent trading flows indicate that market participants have shown considerable buying interest in the 95.875/95.625/95.375 put fly options expiring on September 25 for SOFR (Secured Overnight Financing Rate). U.S. Commodity Futures Trading Commission (CFTC) futures position report: As of February 18, CFTC position data shows that hedge funds actively closed out short positions in 10-year Treasury futures, with the closing scale equivalent to approximately $10.3 million in DV01 risk exposure. The total net short covering by hedge funds across all futures contracts amounts to approximately 340,000 10-year Treasury futures contracts, the largest scale since November of last year. In the same week, asset management companies reduced their net long positions in 10-year Treasury futures by approximately 151,000 contracts, with the largest reduction occurring in 5-year Treasury futures