Bond Market Ahead Of US Fed Decision: Bond traders have piled into bearish positions ahead of Wednesday's Federal Reserve meeting, betting that the Treasury selloff driving yields to their highest in almost two decades will continue.
The benchmark US 10-year yield rose to its highest level since 2007 on Tuesday as traders braced for the Fed to hike interest rates in response to inflation worries. The two-year yield, meanwhile, hit its highest since 2024.
Market positioning indicates investors anticipate more bond weakness ahead and have little appetite for buying the dip. Traders in the cash market ramped up their short bets in the past week at the fastest pace since early 2025, according to JPMorgan's Treasury client survey.
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Investors also increased short positions in Treasury futures both before and after last week's stronger-than-expected inflation report, open interest data from CME Group Inc. show. In fed funds futures, a single bearish block trade stands to earn — or lose — $1.9 million for every basis point move in the underlying contract. Swaps are pricing some 50 basis points of Fed tightening for the remainder of the year, including September's meeting.
“Over the last week, we have seen rapid build in the short base as the market chases the move higher in yields,” said Citi strategist David Bieber, adding that short positioning “is tactically extreme.”
The bearish positioning comes ahead of a Fed meeting for which Wall Street is pricing in a more than 90% chance that the central bank will deliver its first rate increase since 2023 — a level of conviction that has proven right for decades. A war-driven surge in oil prices, signs of rebounding inflation and budget worries have helped cement that certainty.
The Fed is under “enormous pressure” to deliver a 25 basis-point hike, Jason Thomas, Carlyle's head of global research & investment strategy, said in an interview with Bloomberg TV.
“People have been hurt by this cumulative increase in prices,” he said. “Living standards have declined, and I think the Fed has to get serious about delivering on the price stability mandate.”
Failure to raise rates — or even a hike followed by lack of clarity about additional increases — could push traders to demand even higher yields on long-term bonds to guard against inflation while dragging down shorter-term yields, which closely track Fed policy.
Some market participants have positioned for the latter outcome: Tuesday's trading in short-term interest-rate options has included a demand surge for inexpensive October and November calls on futures linked to the Secured Overnight Financing Rate, another instrument that's heavily influenced by the monetary policy outlook.
However, that remains a peripheral view for now, with the broader SOFR options market looking to hedge additional rate hike premium to be priced into front-month futures contracts in the coming months.
Yields on 10-year Treasuries edged one basis point lower to 4.99% in Asia trading Wednesday.
“Positioning remains skewed bearish into the Fed. Shorts have built across the curve, asset managers have largely cut longs or added shorts, and there is still little evidence of dip-buying in duration,” Bank of America strategists Meghan Swiber and Eleanor Xiao wrote.
Here's a rundown of positioning indicators across the rates market over the past week:
JPMorgan Treasury Client Survey
Into the continued grind higher in yields, JPMorgan clients have aggressively added to short positions, which jumped 10 percentage points in the week up to Sept. 14, with most shifting from neutral which dropped 8 percentage points. The all-client survey has now shifted to show the least amount of net longs in about four months.
SOFR Options Positioning
Across SOFR Dec26, Mar27 and Jun27 options, there has been a large amount of new risk seen in the 95.4375 strike largely due to a massive new short vol structure via Jun27 straddle sales. Over Friday and Monday's session approximately a combined 80,000 position has amassed a premium of over $100 million. Approximately 30,000 of the straddle was sold on Friday for new risk and then around 50,000 of the same straddle was sold Monday. The June 2027 SOFR options expire June 11 next year.
Open interest remains most elevated in the 96.50 strikes, where there remains a heavy amount of Dec26 calls positioning. Following Friday's CPI, there was a decent amount of new downside protection initiated, in positioning which looks to target additional Fed rate hike premium over the coming months. Notably the SFRZ6 95.875/95.8125/95.75 broken put trees and SFRZ6 95.9375/95.8125/95.4375/95.3125 put condors were heavily traded.
Treasury Options Skew
The premium paid to hedge Treasury futures in the long-bond contracts continues to favor puts, as traders pay more for hedging a selloff in the long-end of the curve vs. a rally from current levels. Options skew from 2-year notes out to the 10-year notes continues to hover closer to neutral.
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