by Edward Bolingbroke and Michael Mackenzie
Bond traders exited wagers in futures and cash Treasuries in the past week, turning more neutral as brinkmanship around tariffs clouded the outlook for the economy and the Federal Reserve and threatened to boost turbulence.
In Treasuries futures, traders unwound positions across shorter maturities on Monday by the most since November as the looming kickoff of President Donald Trump’s levies roiled markets. Positions in two-year Treasury contracts now amount to a little over 4.1 million, the fewest since June. Meanwhile, investors in cash Treasuries have pulled back sharply from the biggest net long stance in almost 15 years, JPMorgan Chase & Co.’s latest client survey shows.
The start of this week showed the risk of carrying stretched positions around tariff deadlines. As traders braced for US levies to take effect Tuesday, short-dated Treasury yields surged and rates on longer maturities sank, signaling that investors were worried the levies would fuel inflation and slow the economy. Much of that move then reversed as the president agreed to pause tariffs on Mexico and Canada, with US yields falling for a second day on Wednesday.
“You have to be super careful about whatever your story of the economy is — you’ve got to be careful about actually putting money to work behind it,” said Ed Al-Hussainy, a rates strategist at Columbia Threadneedle Investment. “A lot of people have become much more neutral on duration and not wanting to take that volatility.”
All the developments around tariffs left traders hedging various scenarios linked to the next Fed policy meeting, in March. In options linked to the Secured Overnight Financing Rate, which closely tracks the central bank’s policy path, Monday’s action was dominated by a mix of dovish and hawkish hedging for the March 19 rate announcement.
Swaps rates are currently pricing in just three basis points of easing into the meeting, or a bit more than a 10% chance of a cut, mirroring policymakers’ recent signals that they’re not in a rush to cut rates again as they monitor the policy mix of the new administration. However, elevated activity around the April SOFR options contracts signals that traders see the potential for the market outlook to shift in the coming weeks.
The yield on US 10-year notes slipped two basis points to 4.49% as of 8:50 a.m. in London, while the two-year rate, which is more sensitive to monetary policy changes, was broadly stable around 4.21%.
Here’s a rundown of the latest positioning indicators across the rates market:
In the week to Feb. 3, a sharp positioning swing among JPMorgan clients’ saw their outright shorts jump 10 percentage points, the largest increase since 2019, while long positions tumbled. As a result, the all-client survey now shows the smallest net-long stance since December.
Options hedging in Treasuries now shows a large disparity between the long end of the curve, where traders are paying a heavy premium to hedge against a selloff, versus the front end and belly, where the premium is closer to neutral. The setup supports the steepening move seen over part of Monday’s session, as the long end of the curve underperformed. Flows Monday included a large Week 1 option in long-bond notes, targeting a 30-year yield jump to around 4.88%, from roughly 4.75% now.
Open interest over the past week in SOFR options out to the Sep25 tenor have seen a large amount of new risk added in the 96.0625 strike, with recent flows including a buyer of the Jun25 96.0625/96.1875/96.375 broken call fly. There has also been a decent amount of new risk added in the 95.625 strike following flows last week, including a buyer of the Jun25 95.625/95.50 put spread.
In SOFR options out to the Sep25 tenor, the most-populated strike remains at 96.00, largely due to a heavy amount of Mar25 calls and Jun25 puts at that level. There has also been increased activity seen in the 95.875 strike, with recent flows including a buyer of the SOFR Sep25 95.875/95.625/95.375 put fly structure. Recent flows around the 96.00 strike have included outright buying at a level of 11 ticks for new risk.
In CFTC data to Jan. 28, hedge funds aggressively added to net short duration across the US futures strip for a combined 251,000 10-year note futures equivalents. On the flip side, asset managers added to their net duration long by approximately 146,000 10-year note futures equivalents. In terms of sectors, the largest positioning swings were seen in 10-year note futures, where hedge funds extended net short by $13.3m/DV01, and in SOFR futures, where $5.3m/DV01 was added to net short.
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