US Treasuries Gain Before Fed Decision, Traders Bullish on Rate Cut Hopes

Traders are betting on a potential rate cut from the Federal Reserve in March, pushing US Treasuries higher ahead of the decision. Yields across the curve have declined slightly as the market anticipates Jerome Powell's press conference for clues on future policy direction.

Despite expectations of steady rates this week, swaps indicate a 30% chance of a cut coming in March. This optimism stems from recent market volatility and benign inflation data.

Bullish sentiment towards Treasuries is evident in surveys, with JPMorgan's latest client report showing the largest net long position in US government debt in nearly 15 years. Investors like Carmignac's Kevin Thozet prefer Treasuries over European sovereigns due to the Fed's accommodative stance and the deflationary impact of AI advancements.

December's low inflation numbers and comments from Fed Governor Christopher Waller suggesting a potential easing in mid-year have also fueled expectations of a rate cut. However, President Trump's tariff plans remain a wildcard that could impact the economy.

Citigroup strategist Edward Acton notes the possibility of Powell postponing a March cut given the uncertainty surrounding the tariffs. Meanwhile, open interest in Treasury futures and long positions are increasing, indicating a buildup in bullish bets.

Positioning indicators show strong net long positioning among JPMorgan clients, a shift towards calls over puts in Treasury options, and increased risk in SOFR options and futures.

As of January 27, JPMorgan clients' net long positioning reached its highest since October 2010. Treasury options premiums have turned in favor of calls, reflecting a preference for hedging against a bond rally.

Notable options activity includes a $72 million trade hedging lower yields in the coming weeks. In SOFR options, the most-traded strike remains at 96.00, with significant risk added in surrounding strikes.

Overall, the market is bullish on Treasuries, anticipating a potential rate cut from the Fed. However, the impact of President Trump's tariff plans remains a key uncertainty that could influence the Fed's decision-making.