After Powell finally gave the green light to a rate cut, some new, large positions are being opened in the market, which haven't gone unnoticed. On Friday, they purchased call options on 10-year Treasury futures contracts with a premium of just $20 million. By my calculations, the buyer of these October 2025 call options, with 114 strike rights, expects the interest rate to fall to 4.00% at that maturity. Considering that the 10-year Treasury yield was at 4.20% at Friday's close, and considering the dataset's slowdown in growth, this isn't a far-fetched idea. The transactions represent a total purchase of 100,000 contracts. A bond price of 114 at maturity would represent an increase of approximately $150 million compared to Friday's close. In fact, if you have sufficient capital, a $20 million risk for a $150 million profit target doesn't seem like a bad idea. It's highly likely that when the market moves favorably, the trader involved will manipulate the position with other options and reduce the cost. It's important to remember that a similar position was previously opened on August 19th, with a $15 million premium paid for an option position that would see the price reach 113 at maturity. The target of this trade is to achieve a 4.12% interest rate.
In recent years, we've had to learn our own systems—from Japanese long-term bonds to the American lawmaking system—for other countries. Of course, I don't want to add to those. But if you're involved in euro trading, educating children in Europe, trading currency pairs, or seeking to capitalize on opportunities arising amid major market trends, it would be beneficial to follow the confidence vote in France on the 8th.
The French government, which has been struggling with its budget for some time, requested a vote of confidence before passing the budget. Following the news, French bonds quickly sold off, becoming cheaper than German bonds. The yield spread between the two has widened to 80 basis points. If the situation doesn't escalate into a crisis, the appeal of French bonds will remain. However, if the government collapses, bonds will sell off further and become even cheaper. Eventually, when a permanent government is formed, those who bought these bonds cheaply will have the opportunity to reap the rewards. With this logic in mind, French bonds are accumulating a significant premium.
Just before the Supreme Court ruled that Trump's tariffs were unlawful, some investors bought 133,500 contracts of written options on the VIX on Friday. These options, purchased with 31 strike rights, paid more than $12 million. There doesn't seem to be any turmoil for now, but today's holiday means we haven't yet seen the true market reaction. We'll see what happens the rest of the week. But in any case, one wonders: how did they enter such a large position at such a timely and seemingly unprovoked time? Were they aware of something?
The positions of large traders in futures contracts are important in reflecting the overall market sentiment. In this context, when I look at the position changes in the bond market, I see that the trend is on the buying side at every maturity of the yield curve. In other words, the market is celebrating the interest rate cut with a festive atmosphere. I haven't noticed any particular trend in currency pairs; some are buying against the USD, while others are selling. However, there is one noteworthy point: overall short selling in the USD has decreased slightly. In the stock indices, I see a significant short squeeze on the Russell index, while there's some selling in the S&P 500 futures. There's also very little buying in the Nasdaq index. In my opinion, the market will try to consolidate at these price levels, creating a buy-and-hold environment for a while. Then, continue upwards...
