Ahead of this week's US August CPI data release, investors have amplified their bullish bets on US Treasuries as a series of weaker-than-expected economic data has opened the door for Federal Reserve rate cuts in September and further monetary policy easing in the coming months.

JPMorgan's Treasury client survey showed long positions increased by 2 percentage points while short positions remained unchanged, staying at their highest levels since early February. Additionally, in the week ending September 2, asset management firms added long positions across most US Treasury futures contracts, with 10-year Treasury futures being the most favored.

As 30-year Treasury yields continue to distance themselves from the critical 5% level, options skew on the long end of the Treasury curve has recently shifted to favor call options, indicating traders are paying small premiums to hedge against declining long-end yields rather than rising ones.

The market's dovish stance is reflected in open interest - the new risk positions held by traders. Following Friday's weak employment report, October federal funds futures added approximately 70,000 contracts, marking the largest single-day increase on record for that month.

In SOFR options, which closely track the Fed's policy path, large positions have emerged betting on a potential 50 basis point aggressive cut at next week's meeting - though such a move is considered unlikely.

"It's now almost certain that the Fed will cut rates at next week's meeting, with further cuts in the coming months. The question is by how much," said Bill Adams, Chief Economist at Comerica Bank.

Following a series of reports showing the US economy is cooling, 10-year Treasury yields have declined from July highs to approximately five-month lows. Friday's nonfarm payrolls data showed US August job additions of only 22,000, while the unemployment rate rose to its highest level since 2021.

On Tuesday, another report from the Bureau of Labor Statistics showed total nonfarm employment for the year through March was revised down by 911,000, significantly exceeding market estimates of a 700,000 downward revision.

Wall Street has hastily adjusted its rate cut trajectory predictions. Many now expect the Fed to take more aggressive easing measures. For instance, Barclays economists now anticipate the Fed will cut rates by 25 basis points at each of the three remaining meetings this year, compared to their previous forecast of only two cuts for the remainder of 2025.

While interest rate swaps have fully priced in a 25 basis point cut next week, the series of weak data has emboldened some market participants to bet on larger cuts. Steven Englander, Global Head of G10 FX Research at Standard Chartered Bank, stated in a Tuesday report before the employment revision data: "We recognize this is moving ahead. But we expect preliminary revisions to employment data from April 2024 to March 2025 will support our call for a 50 basis point September cut."

However, not everyone believes the Fed will be so aggressive in September or the coming months. Tuesday's Fed swap data showed total rate cuts priced for the remaining three meetings this year at approximately 67 basis points, still about 8 basis points short of three 25 basis point cuts.

"A large 50 basis point cut would frighten the market because people would ask, 'Are we missing something the Fed knows?'" noted Jeff Given, Senior Portfolio Manager at Manulife Investment Management. He added that if September employment data recovers, "then the Fed might indicate they could cut rates every other meeting going forward."