Bond traders are taking on a record amount of risk as they bet big on a Treasury market rally fueled by expectations the Federal Reserve will embark on its first interest-rate cut in more than four years.
The number of leveraged positions in Treasury futures has risen to an all-time high ahead of the central bank’s annual economic symposium in Jackson Hole, Wyoming, which will commence on Thursday. At the event, Fed Chair Jerome Powell will speak and provide more insights into the central bank’s monetary policy path for the rest of this year.
Open interest in futures, or the amount of risks taken by traders who can be long or short positions, peaked at a record of almost 23 million 10-year note futures equivalent, last week, CME Group Inc. data and Bloomberg analysis shows. That’s roughly $1.5 billion of risk per one basis point move in the underlying cash notes.
The rise coincides with a ramp-up in bullish wagers over the past couple of weeks that call for aggressive rate cuts over this year and 2025. Asset managers extended net long positioning by roughly 120,000 10-year note futures equivalents, according to Commodity Futures Trading Commission data for the week ending Aug. 13.
While most of the leverage positions are asset managers going long Treasury futures, some of it can be attributed to the basis trade, a popular hedge fund strategy in which traders make money from the spread between cash Treasuries and futures.
Since that strategy involves borrowing through repo markets, if lending conditions tighten traders could be forced to cash out of their positions to repay their loans. Such a rapid unwind could cause volatility in the Treasury market.
Traders, who have been anxious about the timing and the size of Fed rate cuts, have been betting on a wide variety of scenarios that can play out this year. Just two weeks ago, the swaps market was pricing in a half-point rate cut at the September Fed meeting along with some risk of an intra-meeting emergency reduction. Currently, about 30 basis points of cuts are priced in for next month.
The cash market is already showing signs that the once extended bullish wager may be starting to unwind ahead of Jackson Hole. JPMorgan Chase & Co.’s Treasury client survey released Tuesday showed the net long position reduced to the fewest amount in a month.
Here’s a rundown of the latest positioning indicators across the rates market:
JPM Survey
In the week ending Aug. 19, JPMorgan’s Treasury client survey showed a drop in long positions of 6 percentage points leaving the net positioning at least long in around a month, with short positions rising 5 percentage points over the week.
Hedging Premium Eases
The premium paid to hedge market moves continues to ease back toward neutral, after spiking a couple of weeks ago to favor call premium as traders looked for a continued bond market rally. Treasury options flow on Tuesday included a $5 million premium long-vol wager via a strangle buyer in the October options, which expire two days after the Sept. 18 Fed policy announcement. Toward the back-end of last week, theme of traders targeting higher 10-year yields was seen via some heavy flows around the September and October 10-year put options.
Shifting Flows
While SOFR futures and options volumes have decelerated over the past couple of sessions, flows around the September tenor are now focused toward 25-basis-point Fed policy moves and away from potential for half-point rate cuts at the September meeting. Flows last week also appeared to include the unwind of half-point cut wagers resulting in some heavy liquidations seen across some Dec24 and Mar25 put strikes. The largest cash outs over the past week have been in the Dec24 97.00 and 96.00 call strike following the unwind of an existing 96.00/97.00 call spread structure and flipping to a fresh 96.50/97.50 position.
SOFR Options Heatmap
In SOFR options out to the March 2025 tenor the 95.50 strike is now the most elevated in terms of open interest, after seeing a rise over the week in the Dec25 calls via trading of the 96.00/96.50/97.00/97.50 call condor (see details above).
Extending Duration Longs
There were some large positioning shifts for the week ending Aug. 13, with asset managers extending duration longs by roughly 120,000 10-year note futures equivalents and hedge funds taking the other side and adding to net duration short by approximately 315,000 10-year note futures equivalents. Hedge funds bearish stance in 10-year note futures pushed the net short position to over 2 million futures contracts, a record amount.
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