Bond traders are tilting dovish again, piling into wagers that would benefit from a faster pace of Federal Reserve interest-rate cuts as Treasuries rally.

While US yields inched higher on Wednesday, 10-year rates have declined by more than a quarter point in recent trading sessions, tumbling after the Fed’s preferred inflation gauge held steady and measures of manufacturing and spending came in softer than expected. Further reports on private jobs growth and economic activity are due Wednesday.

Swaps traders have moved up expectations for the Fed’s first full 25 basis-point rate cut to November from December. In the cash market, JPMorgan’s Treasury client survey showed outright long positions rising to the highest since March, a further sign of positive momentum.

“The next move that the Fed is going to make is ultimately going to be one that protects the strength of the labor market, rather than one that in which they need to be fighting inflation,” Kelsey Berro, fixed-income portfolio manager at JPMorgan Asset Management, told Bloomberg Television Tuesday. “We do think that inflation generally is under control.

In step with the renewed bullishness, recent patterns in open interest point to short covering, with a notable cut in risk seen in 10-year note futures following Monday’s market gains. Meanwhile, the options market saw a new influx of dovish hedges linked to the Secured Overnight Financing Rate, which closely tracks the central bank policy path.

Traders Further Target Faster Pace of Fed Cuts in SOFR Options

Over Monday and Tuesday’s sessions this week, traders have been targeting protection against a faster pace of rate cuts — perhaps two by the September meeting. It’s a shift from a week ago, when revived rate hike chatter from Fed officials fueled demand for hawkish protection. That said, some traders continued to position for higher-for-longer rates.

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

Cash Longs Extended

In the week up to June 3, JPMorgan Treasury clients added to long positions slightly, pushing the outright level to the highest since March 25 and the fewest neutral positions since Jan. 29. Short positions were unchanged on the week.

Asset Managers Unwind Duration Long

So-called real-money accounts bucked a six-week trend of extending duration longs in Treasury futures after CFTC data in week up to May 28 showed long liquidation — roughly 170,000 10-year note futures equivalents. The heaviest such liquidations were seen in the long end of the curve. On the flip side, hedge funds covered net shorts over the week by an approximate amount of almost 200,000 10-year note futures equivalents.

Premium Switch to Hedge Bond Rally

The cost of hedging moves in Treasuries via the options market has switched to a premium being paid to hedge a rally over a selloff across all tenors, as the bond market rally extended this week. In the 10-year tenor, the cost to hedge a rally has pushed to roughly the most expensive since February.

The newly found expense on Treasury calls versus puts has led to some profit-taking on recently established winning bullish wagers, including heavy unwinds of calls in both five- and 10-year options seen in the aftermath of Tuesday’s softer-than-expected JOLTS job openings. That triggered a drop in 10-year yields to the lowest since May 16, testing both 100- and 200-DMA levels.

Treasuries Rally Spurs Big Profit-Take on Bullish Options Wagers

SOFR Options Heatmap

The most populated SOFR options strike remains the 94.875 level, which features outstanding trades such as the SFRU4 94.875/94.8125/94.75 put fly and the SFRU4 94.8125/94.875/94.9375/95.00 call condor which was bought last week. The 94.625 strike also remains heavily populated with positioning around the level including the SOFR Sep24/Dec24 94.875/94.625 put spread/spread.

Active SOFR Options

The past week has seen largest open interest shift in the 94.8125 strike, following flows including buyer of the SFRU4 94.8125/94.875/94.9375/95.00 call condor. Decent jump in open interest also seen in the 94.5625 strike following a large outright buyer in the strike. Heaviest liquidation was seen in the 94.50 strike, driven mostly by unwinds seen in the Dec24 puts.

–With assistance from Carter Johnson and Ye Xie.

(Updates with latest moves from second paragraph.)