Traders are beginning to bet on losses in the US Treasury market as they adjust for a more gradual pace of Federal Reserve interest-rate cuts.
Since a resilient September jobs report late last week, bond traders have been abandoning long positions in the futures market as part of a broad unwind of bullish wagers that hinged on a series of big rate cuts this year and into early 2025.
At the same time, wagers on losses for US bonds are starting to emerge. The move has led to the biggest outright short position in the cash market since February 2023, according to a survey of JPMorgan Chase & Co. Treasury clients. Yields on 10-year benchmark Treasuries were holding above 4% on Wednesday morning in London.
There’s an “appetite for new short risk ahead of this week’s inflation release,” Citigroup Inc. strategist David Bieber wrote in a note on Tuesday.
The fresh short positions are being formed ahead of Thursday’s key inflation data, which could further upend traders’ wagers on monetary policy after last week’s jobs data raised the specter of price pressures once again. While the latest consumer price index read is expected to show further deceleration, any above-expectations print could jump-start a greater shift into short positions.
Fed swaps are currently pricing in approximately 21 basis points of rate cut premium into the Nov. 7 policy meeting and a combined 50 basis points of rate cuts over the two remaining meetings this year. Prior to the payrolls number, around 66 basis points of combined cuts were priced by the December meeting.
The recalibration is stark, particularly in the futures market. Open interest, or the number of positions held by traders, has plunged across contracts linked to the Secured Overnight Financing Rate in the days since the employment report.
In the December 2024 tenor, the two-day position reduction has amounted to approximately 223,000 contracts, equivalent to $5.6 million per basis point in risk, CME data released Tuesday shows. Over that time the contract has sold off sharply, signaling a wipe out of bullish bets as traders re-priced the central bank’s policy path for this year to account for less aggressive easing.
Long positions are also vanishing in the cash market. The latest JPMorgan Treasury client survey showed that traders were net short last week for the first time since April 2023.
Meanwhile, in the SOFR options market, new positions since Friday’s payrolls have been skewed toward hedges targeting even more gradual easing — a quarter point in November and then a pause in December.
Here’s a rundown of the latest positioning indicators across the rates market:
In the week up to Oct. 7, JPMorgan clients cut longs by 9 percentage points and added 3 percentage points to short positioning. The result saw the biggest outright short position since February 2023. Neutrals remain elevated at 67 percentage points, rising 6 percentage points on the week.
Largest positioning shift over the past week was across strikes linked to structures around December 2024 puts as traders looked to add bearish positions following Friday’s jobs report and subsequent re-pricing of the Federal Reserve policy path. One stand-out flow was heavy buying of the Dec24 95.5625/95.4375 put spread, a position that targets just one 25-basis-point rate cut over this year’s two remaining policy meetings. Additional downside flows included buyer of Dec24 95.8125/95.6875 1x2 put spreads and Dec24 95.8125/95.75/95.6875 put trees.
In SOFR options out to the June 2025 tenor, the 95.50 strike remained the most elevated with a vast amount of both Dec24 calls and puts occupying the level. Recent flows around the strike have outright buying and downside activity including SFRZ4 95.625/95.50 put spreads bought with SFRZ4 95.5625/95.4375 put spreads. The second-most populated strike is the 96.00, where recent flows have included buyers of the Jun25 96.00/95.50 1x2 put spreads with the SOFR Jun25 96.25/95.625 1x2 put spreads.
Leveraged funds covered around 57,000 10-year note futures equivalents to net short positioning across the Treasury futures strip in the week up to Oct. 1, CFTC data shows. Over the same period, asset managers added around 152,000 10-year note futures equivalents to net long positions. In SOFR futures, asset managers unwound net longs by around $4.4 million per basis point in risk.
The premium paid to hedge the Treasury market has again been skewed toward put protection, indicating that traders are paying a higher premium to hedge a bond market selloff over a rally. The premium is most expensive in the long-end of the curve, indicated by the skew favoring puts on long-bond options. The shift has captured the market selloff which has seen 10-year yields rise as high as 4.05% Tuesday, cheapest levels since the start of August.
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