Fed's Three Consecutive Dovish Statements Signal a Bull Market for U.S. Treasuries: Surging Options Bets on 4% Yield

TradingKey - As geopolitical tensions in the Middle East ease and multiple Federal Reserve officials signal dovish interest rate cuts, options market traders are heavily betting that the yield on 10-year U.S. Treasury bonds will return to its early-2025 lows, fueling rising expectations of a bull market for U.S. Treasuries.

According to Bloomberg, bond traders have shown surging interest in August call options for U.S. 10-year Treasuries. At least $38 million in premium bets were placed last Friday (June 20) and Monday, aimed at hedging against potential declines in 10-year Treasury yields from their current level of 4.3% down to 4.0% over the coming weeks.

If Treasury yields move according to these expectations, the yield on 10-year Treasuries would fall back to levels seen in early April, which marked this year’s lowest point.

2025 yield movements in 10-year U.S. Treasuries, Source: Investing.com

This significant bet on falling Treasury yields has mainly been driven by improved prospects for Federal Reserve rate cuts. While the Federal Reserve’s June monetary policy meeting revealed some FOMC members’ concerns about stagflation, recent comments from several Fed officials indicate optimism regarding limited inflationary effects of tariffs and the possibility of earlier rate cuts.

After Waller and Bowman expressed support for rate cuts as early as July, Austan Goolsbee, Chicago Fed President and voting member of the FOMC this year, also voiced optimism about the outlook for rate reductions, stating the Fed might resume cutting rates if tariff-related inflation remains contained.

Goolsbee said, “Somewhat surprisingly, thus far, the impact of tariffs has not been what people feared.”

He added that if higher tariffs don't lead to visible inflation, then in his view, the economy hasn't deviated from its "golden path" — the trajectory it was following before the imposition of tariffs.

Additionally, on the first day of Federal Reserve Chair Jerome Powell's congressional testimony, while he reiterated uncertainty about the impact of tariffs and maintained a wait-and-see stance on rate cuts, he also suggested that many scenarios remain possible.

Powell said that inflation may not prove as strong as expected, and declining inflation alongside a weakening labor market could mean the Fed opts for an earlier rate cut.