Bond Traders Bet Big on U.S. Treasuries Ahead of Non-Farm Payroll Report

In recent weeks, bond traders have rapidly established long positions in U.S. Treasuries, pinning their hopes on the upcoming June non-farm payroll report to sustain the bond market's rebound. The report, scheduled for release on Thursday, is seen as a crucial test for the bullish outlook in the bond market. Prior to this, data released on Tuesday showed an unexpected surge in U.S. job openings in May, indicating a robust labor market and triggering a sell-off in the bond market.

Strategists have noted a continuous buildup of long positions in U.S. Treasuries, with tactical positions becoming "highly one-sided" following a week of significant accumulation. This trend is evident in the U.S. Treasury futures market, where traders have been consistently adding to their long positions, driving yields lower. The number of open contracts for 10-year Treasury futures has seen a substantial increase, while the 10-year Treasury yield has fallen from above 4.4% to a low of 4.185% on Tuesday. Similarly, open interest in 2-year Treasury futures has risen for 10 consecutive trading days.

The bullish sentiment in the U.S. Treasury market is also reflected in the options market. On Monday, traders spent up to 32 million dollars to purchase options betting on further gains in 10-year Treasuries. However, the high concentration of long positions in the U.S. Treasury market poses a risk. If the employment data fails to support expectations of a rate cut by the Federal Reserve as early as next month, traders may start to unwind their positions. A global rates strategist warned that if the non-farm payroll data comes in stronger than expected, the probability of a rate cut in July could drop to zero.

Given the high concentration of long positions, market participants are also positioning themselves to hedge against potential increases in yields. On Tuesday, traders established hedging positions, betting that the 10-year Treasury yield would rebound to around 4.3% by the close of trading on Thursday. The upcoming non-farm payroll report will be closely watched as it could provide further clarity on the direction of the bond market and influence traders' positioning in the coming days.