Traders Pile Into Bullish Wagers on 10-Year Yields Below 4%

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Traders Pile Into Bullish Wagers on 10-Year Yields Below 4%

treasuries & bonds :: 2026-01-07 :: source - bloomberg

By Edward Bolingbroke

(Bloomberg) -- Traders in Treasury options are boosting bets that US 10-year yields will bust out of their recent range and tumble below 4% in the coming weeks to levels last seen in November.

The bullish tilt in options has been building since the end of December, amid a stretch of limbo as investors awaited the release, starting this week, of key economic statistics unaffected by the government shutdown. The benchmark 10-year rate has meandered within a span of roughly 0.1 percentage point over the past month.

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Positioning data released Tuesday showed further buying in March 10-year options targeting a bond rally. Flows this week have featured one large buyer of contracts anticipating a drop in yields to around 3.95%, from a bit below 4.2% now.

The options expire Feb. 20, meaning they include the Federal Reserve’s next policy announcement on Jan. 28. Traders expect the central bank will likely pause after cutting interest rates three straight times to counter signs of a cooling jobs market.

The positions in 10-year options could move closer to being in the money by the end of this week, with an array of labor-market releases ahead, culminating in Friday’s government employment figures for December. Job gains probably remained modest last month, economists expect. Buying of protection against gains in 10-year notes continued Tuesday, with heavy flow seen in February 10-year calls that expire Jan. 23.

Meanwhile, in the cash market, sentiment has taken a bearish turn, according to JPMorgan Chase & Co.’s weekly survey of Treasury clients. The poll showed a large shift into short positions, which could bolster short-covering demand and potentially send yields lower, should the data ahead add to worries around growth.

US Treasuries gained Wednesday morning, though lagged European peers. The 10-year yield fell three basis points to 4.14% while the two-year yield was one basis point lower at 3.46%.

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

JPMorgan Survey

For the week ending Jan. 5, JPMorgan client long positions dropped 11 percentage points, while shorts rose 6 percentage points. As a result, the all-client survey shows the smallest net and outright long positions since October 2024.

SOFR Options

In SOFR options across Mar26, Jun26 and Sep26 tenors, open-interest changes have been minimal over the past week as both futures and options volumes were low over the holiday period. The past week has seen demand for downside structures across the Mar26 options, with flows including large buyer of the 96.50/96.375/96.3125 put ladder seen over Monday’s session. The position looks to fade the amount of Fed rate-cut premium priced into the swaps market, which is currently around 13 basis points of easing combined across the January and March policy meetings.

The broader open-interest picture in SOFR options out to the Sep26 tenor show the 96.50 strike remaining the most elevated in terms of risk, featuring a large amount of Mar26 calls and puts positioning. There also remains a large amount of risk in the Mar26 96.375 and 96.3125 puts, while the 96.75 strike holds a sizable amount of Mar26 and Jun26 calls.

Treasury Options Premium

The premium paid to hedge Treasuries risk over the past week has drifted back to neutral, after favoring puts over calls in the final two weeks of 2025. The move back to neutral reflects investors paying closer to equal premiums on both calls and puts, a shift from paying up to hedge against a selloff in the long-end of the curve.