Traders are increasingly betting that volatility in US government bond markets will continue to ease, even as uncertainty lingers over a lasting peace agreement between the US and Iran, according to a report by Bloomberg.
A key gauge of volatility in US Treasuries has retreated to levels seen before the recent conflict, prompting investors to build positions that would benefit from a period of relative calm and range-bound yields in the weeks ahead.
So far in April, the benchmark 10-year Treasury yield has traded within a narrow band of around 16 basis points. A temporary ceasefire between the two countries has helped stabilise oil prices after they surged to multi-year highs, contributing to the subdued rate moves.
Options markets reflect this shift in sentiment, with increased appetite for strategies that profit from declining volatility, including short positions in straddles and strangles tied to 10-year notes. Activity has been particularly concentrated in June-dated options, where traders have put on sizeable positions anticipating limited market swings.
However, some market participants are cautioning that expectations for sustained calm may be premature. Analysts at JPMorgan Chase have warned that volatility could re-emerge, pointing to ongoing risks around inflation, the labour market and the durability of the ceasefire. They also highlighted uncertainty surrounding the nomination process for Federal Reserve chair candidate Kevin Warsh.
Recent price action has underscored how sensitive markets remain to geopolitical developments. Volatility ticked higher earlier in the week following reports of delays in diplomatic efforts, although a subsequent extension of the ceasefire helped steady sentiment. Oil prices moved back above $100 a barrel, while the 10-year Treasury yield held near 4.29%.
Expectations that the Federal Reserve will keep interest rates on hold in the near term have also reinforced the view that yields will remain contained. Warsh, speaking during testimony, avoided giving clear guidance on the policy outlook, supporting a broadly cautious, wait-and-see approach among investors.
Market positioning data suggests a growing tilt towards bullish bond bets. A recent survey of JPMorgan clients showed a reduction in short positions alongside an increase in long exposure, leaving net positioning at its most positive level in several weeks.
In derivatives markets, investors have continued to favour structures that benefit from stable or lower rates, including receiver-based trades that position for potential monetary easing further out. Strategists at Barclays noted that flows indicate a broad-based bias towards selling volatility, approaching levels last seen at the start of the year.
At the same time, pricing in options markets suggests that demand for downside protection has moderated. Skew in both short- and long-dated Treasury options has moved closer to neutral, although some preference for hedging against a sell-off in longer-dated bonds remains.
