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(Bloomberg) -- Traders in the futures and options markets are loading up on bets the Federal Reserve will have to lower rates this year by more than expected because of the Trump administration’s aggressive policy agenda.

The tough talk on tariffs out of Washington has pushed investors toward haven assets such as Treasuries, which are poised to become more attractive if recent signs of economic trouble keep building. The rising possibility of an economic downturn fueled fresh demand for both short- and long-dated Treasury futures on Monday.

Options traders are anticipating the risk will ramp up pressure on the Fed to boost the economy by cutting rates in the coming months. This has led to growing demand for call options on two-year Treasury notes, which will pay off if the Fed gets more aggressive on rates. The premium on these bullish bets has risen to the highest since last September, when slowing job growth was feeding fears of a slowdown during the final months of Joe Biden’s presidency.

Positions Added Across Treasury Futures in Risk Aversion Trade

Dovish Hedges on Deeper Fed Cuts Dominate SOFR Options Activity

The options tied to short-term Fed rates — known as the Secured Overnight Financing Rate, or SOFR — are reflecting the rising probability of multiple cuts in the coming months. At Monday’s close, the markets had priced in roughly 80 basis points of easing by the end of the year. That is up from as little as 60 basis points in cuts that were priced in at one point last week, though markets continue to anticipate that the first cuts will not come until June.

Trades tied to Fed policy moves will face another big test on Wednesday with the release of February’s inflation data, which could open the door for additional rate reductions if there’s evidence of ebbing inflation. Options traders are currently pricing in a roughly 10 basis point swing in 10-year yields on the day, according to price levels on current at-the-money strikes expiring at Wednesday’s close.

There are signs that some investors believe the flight into bonds could be somewhat overdone. In the cash market for Treasury bonds, JPMorgan’s latest survey of clients showed a slight pull-back in net long positions from the levels seen last week, which were the highest since 2010, as 4% of the outright longs shifted into the neutral bucket.

Here’s a rundown of the latest positioning indicators across the rates market:

JPMorgan Treasury Client Survey

In the week up to March 10, JPMorgan’s Treasury Client Survey showed investors shifting longs into neutral, with shorts unchanged. In total, outright longs dropped 4 percentage points with neutrals rising by the same amount. Last week, the net long position peaked at the highest since October 2010.

Treasury Options Premium

Option traders are continuing to pay a higher premium to hedge a continued bond market rally against a selloff. In the front-end, the call skew remains at the highest it has been since last summer, indicating a premium paid to hedge a front-end rally as investors look to hedge additional rate cut premium over the next 18 months. Recent flows in Treasuries have broadly favored hedges for lower yields and short vol plays, looking to fade the move higher in rates volatility seen in recent weeks. Recent examples have included a buyer of 5-year options targeting 3.85% yield, and a $3.5 million premium short vol play via 10-year strangle sales.

Most Active SOFR Options

Open interest rose sharply over the past week in Sep25 95.625 puts, following recent flows including a buyer of the SFRU5 95.75/95.625/95.50 put fly, where positioning has reached around 30,000 over recent sessions. Other stand out flows have been a buyer of the SFRU5 96.50/97.25 call spread, as activity has built in the 97.25 strike over the past week. For liquidation, one highlight over the past week has been the outright selling in the SFRU5 96.25 calls which has seen open interest in the strike drop sharply, following a position of approximately 110k mostly bought between 11 and 11.5 ticks

SOFR Options Heatmap

In SOFR options out to the Sep25 tenor, the most-popular strike remains at 96.00, where both the Mar25 and Jun25 calls are heavily populated. There has been a build-up in activity in the 95.625 strike which is now the second most heavily traded, due to rising demand for both Sep25 and Jun25 puts in the level. Recent flows have included decent buying in the SOFR Sep25 95.875/95.625/95.375 put fly.

CFTC Futures Positioning

In CFTC positioning up to March 4 net short positioning increased sharply among hedge funds while asset managers added to net long positions. Overall net duration changes on the week saw hedge funds add approximately 348,000 10-year futures equivalents to net short position while asset managers increase net long futures duration by roughly 184,000 10-year note futures equivalents. The net short build from hedge funds was the biggest seen since July while asset manager net duration extension was the biggest since December.