Market bets on Trump appointing a "dovish" Fed chairman, US bond options now have a bullish tendency

Speculations are rife in the market that Donald Trump may eventually appoint a "dovish" successor to replace current Federal Reserve Chairman Powell, prompting a clear bullish sentiment in the US Treasury options market. Over the past week, benchmark bond yields have slightly retreated from previous highs, with changes in options trading reflecting a subtle shift in investor sentiment. Earlier reports suggested that Trump was preparing to remove Powell and install a new chairman who is more inclined to cut interest rates quickly. This rumor had briefly pushed the 30-year US Treasury bond yield to a new high since May, climbing to 5.07% on July 16. However, the White House later stated that the president has no intention of replacing Powell before his term ends (which is in May next year). This statement allayed market concerns, leading to a "relief rally" in long-term US bonds that were previously being sold off due to inflation fears rebounding. Powell has explicitly stated that before considering rate cuts, he will evaluate the actual impact of Trump's new round of tariff policies on the economy. His cautious stance has added uncertainty to the market, prompting investors to focus on the Federal Open Market Committee (FOMC) rate decision on July 30 for more policy clues. It is worth noting that Federal Reserve Governor Brainard recently suggested a rate cut in July, increasing market attention on internal dissent within the Fed. Against the backdrop of falling rates, the risk premium for bearish options on 30-year US bonds has decreased. Previous concerns about rising yields had caused a strong preference for put options, leading to an extreme level of option "skewness" over the past year. As yields fell to around 4.9% on July 22, this skewness began to ease, indicating a reduced concern among investors about significant further declines. Meanwhile, the 10-year Treasury futures market has seen a large number of bullish bets. On Monday and Tuesday, approximately 54,000 September call options contracts were traded, with a total premium of around $23 million. These contracts bet that the 10-year yield will fall to around 4.25% by August 22, compared to the current yield of approximately 4.34%. According to a JPMorgan client survey, in the week ending on July 21, clients increased both their long and short positions in US Treasuries, while the proportion of neutral positions decreased, indicating a more differentiated market stance. Overall net long positions slightly decreased. Data from the Commodity Futures Trading Commission (CFTC) showed that as of the week ending on July 15, asset managers reduced their net long positions on most US Treasury futures contracts, especially on products with maturities ranging from 5 years to Ultra Bond. The reduction in these positions corresponded to a total market value change of about $164 million for every 0.01% (or one basis point) change in market rates. Specifically, reductions in positions were most significant in Ultra 10-year and regular 10-year Treasury contracts, with sensitivity values of around $50 million and $40 million for a one basis point rate change, respectively. Meanwhile, leveraged funds began to cover their short positions in 10-year Treasury bonds, with each one basis point change in rates leading to a decrease in the related position market value by approximately $56 million, indicating that some speculative funds are shifting towards a more neutral trading strategy.