Bond traders are placing large wagers that market volatility will continue to decline, betting on a prolonged period of stability that will keep Treasury yields in a narrow range. After US 10-year yields traded within just 16 basis points this month, investors have ramped up short-volatility strategies, particularly in straddles and strangles on 10-year notes. The trades benefit from expectations that the Federal Reserve will keep its policy rate unchanged in coming months.

This trend has analysts at JPMorgan Chase & Co. warning that the decline in volatility may be overdone, citing continued risks to both inflation and the job market. The $7.3 million premium position in June 10-year options highlights the scale of these bets. Traders are also targeting receiver-based structures in over-the-counter derivatives, anticipating additional policy easing from the Fed.

However, the market remains vulnerable to geopolitical shocks. Bond market volatility edged higher after reports of delays in US-Iran peace talks, causing oil prices and Treasury yields to spike before paring their moves. Despite these risks, the overall sentiment remains bullish, with JPMorgan clients showing elevated net long positioning in the Treasuries cash market. The Fed's wait-and-see stance, reinforced by Federal Reserve Chair nominee Kevin Warsh's testimony, continues to support the market's range-bound outlook.