US equities and bonds experienced a rise on Monday, although the impact of Trump’s tariff exemptions on China was less than extraordinary. The risk premium for US assets, including the dollar, ranges between 2% and 5% across G10 currencies, with recent abnormal FX volatility affecting these figures.
The option market indicates a strong bearish sentiment towards the dollar, with trends showing a tendency to sell USD during rallies. The expectation of a deterioration in US data and ongoing impacts from trade policy changes contribute to the bearish outlook.
Treasury Secretary Scott Bessent Remarks
Treasury Secretary Scott Bessent dismissed the idea of foreign nations, such as China, selling off US Treasuries, attributing recent bond losses to market deleveraging. Despite market stabilisation efforts, the dollar’s risk remains skewed to the downside.
The Empire Manufacturing index is anticipated to rebound, though it remains in negative territory. Recent data, including a rise in NY Fed 1-year inflation expectations by 0.4% and a 6.7% spike in inflation expectations from the University of Michigan survey, reflects uncertainty in the economic outlook.
That US equities and Treasury yields managed gains on Monday, in spite of reduced enthusiasm around the exemptions announced by Trump on Chinese tariffs, tells us how markets are tuning out temporary headlines and focusing more on positioning and macro data. The reaction, or rather the muted nature of it, hints at something deeper—that sentiment is shifting not just daily based on news, but moving with expectations shaped over recent weeks. A broader repricing is underway.
Options Market and Dollar Sentiment
Now, about the 2% to 5% risk premium tagged onto US assets—especially when viewed through G10 FX pricing—it’s notable. It lays bare just how much of the recent foreign exchange activity has been both reactive and speculative. Volatility has inflated these premiums, yes, but not without reason. When watching option skews and volatility surfaces, it’s clear: there’s still apprehension surrounding US stability, or more precisely, the direction of its inflows and economic trajectory. Whatever clarity the market hoped for from trade developments hasn’t materialised.
Options markets aren’t subtle in their message. Flows continue to lean towards dollar selling on rallies, suggesting that buying interest is tepid—more mechanical than fundamental. There’s a belief among certain desks that downside risks in the dollar are under-appreciated, especially if domestic data comes in weak and fiscal tensions persist. This forms part of a larger narrative gaining traction: that the relative strength of the dollar no longer reflects economic outperformance but simply the persistence of positioning and a lack of better alternatives.
Bessent’s remarks on Treasury holdings are worth unpacking. What he effectively stated is that foreign selling isn’t what’s moving bond prices; rather, it’s the result of US institutions shedding exposure as they unwind leveraged positions. We find this plausible and consistent with what fund flows have indicated. That said, if deleveraging continues and data points deteriorate, yields could fall further, driven more by a flight to quality rather than Fed narrative. The market doesn’t like uncertainty without a clear counterbalance, and we’re seeing that dynamic play out across all tenors.
As for short-term economic readings, the Empire Manufacturing index is expected to improve slightly but won’t change its overall negative status. What’s more concerning—and more informative from a trading standpoint—are the inflation readings that have started to surprise. A 0.4% jump in 1-year inflation expectations by the New York Fed, combined with the 6.7% figure from the University of Michigan, isn’t something that derivative markets can ignore. It wasn’t in most models. These are forward-looking indicators pulling sentiment data into parts of the curve where true market opinions manifest.
This complicates things. Even though markets are pricing in softness in future growth, inflation breakevens remain sticky, and the divergence between the two is widening. That’s not great for convexity in rate markets, and it opens the door for gamma plays that profit from inner-term volatility swings. Being short vol into summer might not be as safe as it once was.
From here, everything points to repricing risks on the front end. Options skew reflects concern but not panic, yet. Stability in FX volatility would help contain spillover, but as of now, there’s no strong indication that the volatility will subside. With EURUSD approaching the upper end of its recent range, and cross-asset beta correlations breaking down, further dollar softness would accelerate positioning imbalances. We’re watching vols on high-beta currencies widen quietly—too quietly. It’s not properly reflected in the premium being spent right now.
The market is expecting clarity from scheduled macro updates this week, but so far, forward-looking expectations do not align with trailing data. Many are long risk with implied downside pricing still relatively modest. That gap—with the way options are priced—is where traders need to look. Timing and delta risk are becoming more costly, not less.
