Shakeup in Bond Futures Stands to Reignite Burned Treasury Trade

The unwinding of positions in Treasury futures stands to rekindle a popular bond-market wager that’s been burned as traders pare back expectations for aggressive Federal Reserve interest-rate cuts.

The recalibration is pushing firms to unwind leveraged positions, with some closing out bets against short-dated Treasuries and others unwinding bullish trades on longer-dated bonds. That’s expected to keep fueling buying of shorter bonds and sales of longer-maturity ones, widening the gap between the two.

Such a steepening of the yield curve had been happening steadily until late last month because short-term interest rates usually slide the most when the Fed is easing monetary policy. But the move stalled after the monthly employment report underscored the strength of the economy, casting doubt on how quickly the central bank will continue to cut rates.

Citigroup Inc. strategist David Bieber said the shift prompted investors to wind down leveraged bets over the past couple of weeks, “driving positioning to be rapidly cut from the extremes.”

The unwinding can be seen in open interest shifts over the past week, when risk dropped sharply in both 5- and 10-year note contracts, a signal that traders are closing-out positions. That, along with the similar moves in longer-dated tenors, can support a steeper curve by fueling outperformance in shorter-term bonds.

Over the past couple of sessions, there has been evidence of buying to close out the short positions as open interest fell in some tenors as the market rallied.

Bank of America Corp. strategists Meghan Swiber and Anna (Caiyi) Zhang said in a note that the recent dynamics have made long-bond positions “vulnerable and could support a further bear steepening.”

Here’s a rundown of the latest positioning indicators across the rates market:

JPMorgan Survey

In the week up to Oct. 15, the JPMorgan Chase & Co. survey of clients’ Treasury positions showed net longs rose 9 percentage points to the highest in five weeks. Meanwhile neutrals rose 2 percentage points and short positions dropped 11 percentage points.

Most Active SOFR Options

Largest shifts in open interest across SOFR options over the past week has included gains seen in the 95.6875 and 95.75 strike in Dec24 puts following recent flows including large buying of the SFRZ4 95.75/95.6875/95.625/95.5625 put condor while the SFRZ4 95.8125/95.6875 1x2 put spread has also been bought in decent size.

SOFR Options Heatmap

In SOFR options out to the June 2025 tenor the 95.50 strike remains the most populated in terms of open interest with specific amount of risk held in both Dec24 calls and puts along with Mar25 puts. There has been a recent uptick in activity around the 95.75 strike, the second most populated following recent flows including buyer of the SFRZ4 95.75/95.6875/95.625/95.5625 put condor.

CFTC Futures Positioning

Leveraged funds covered around 38,000 10-year note futures equivalents to net duration short position across the Treasury futures strip in the week up to Oct. 8, CFTC data shows. Meanwhile asset managers unwound approximately 57,000 10-year note futures to net long positioning over the same period.

Bond Put Premium Elevated

The premium paid to hedge a selloff in the long end of the Treasuries curve has reached the most since April, while trading closer to neutral from 2-year out to the 10-year tenor. The elevated premium on puts vs. calls in the long-end of the curve has captured last week’s selloff, when 30-year yields topped at 4.42% and hit cheapest levels since the end of July. This higher premium has coincided with an uptick in implied volatility, which has seen the MOVE index peak this week to the highest since December last year.