Bond traders are maintaining their bets on higher yields, despite having scaled back some of their most aggressive positions. The key US employment data due on Friday could further solidify market expectations for Federal Reserve interest rate hikes.

In recent times, the US bond market has been predominantly steered by bearish forces. Rising oil prices and persistently high inflation above target levels have driven a significant climb in benchmark Treasury yields, prompting traders to increase wagers on rate hikes potentially starting this year. Although market sentiment saw some improvement with the prospect of a US-Iran ceasefire agreement, traders on the whole have maintained a defensive posture.

The yield on the 10-year US Treasury note has retreated from a high near 4.69% two weeks ago to below 4.5%, yet it remains notably higher than the lows touched earlier this year.

Strategists at Bank of America noted in their latest weekly report, "Market positioning remains skewed to the short side." They added that positioning should still lean towards higher yields, "even if the momentum is less clear than before."

Against this backdrop, the US non-farm payrolls report on Friday is expected to show solid job growth for May, with the unemployment rate holding steady at 4.3%. Should the data come in stronger than anticipated, it could further bolster confidence in the current short positions. Conversely, weaker-than-expected data might trigger a near-term short-covering rally, adding upward momentum to the bond market.

The job openings data released on Tuesday, which rose far more than economists had forecast, demonstrated momentum and served as the latest evidence of a stabilizing labor market since the beginning of the year.

In the Treasury options market, traders have been hedging for both upside and downside scenarios over the past week. Notable positions include a $16 million bet that the 10-year Treasury yield will fall to 4.4% by the end of the month, and another wager that the yield will rise above 5%—a level not seen since it was briefly touched in October 2023.