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(Bloomberg) -- Bullish bets in US Treasuries are vulnerable to a sharp reversal if the Federal Reserve takes a more aggressive stance at its upcoming monetary policy meeting.
While investors are pricing only a slim chance that the Fed will lift interest-rates on Wednesday, hawkish messaging from Chairman Kevin Warsh on key issues like inflation could push them to reassess how high the central bank will ultimately lift borrowing costs. That stands to spur a painful unwind in the long positions traders have amassed during a recent haven rush into Treasuries.
“Ahead of the FOMC, the big change has been the market flipping into longs tactically in both Treasuries and European bonds,” wrote David Bieber, a strategist at Citigroup. Traders have chased the gains by building bullish positions, even though the market remains structurally short, he added.
CME Group open interest data show traders whittling down short positions in Treasuries over the past week while placing bets that the gains — driven by worries over the sustainability of the artificial intelligence trade and stress in French bonds — will continue.
Huge position reductions across Treasury futures, especially in those tied to the 10-year note, were seen on Friday. The day before, as Treasuries notched their best session in more than two years, the same tenor saw a large amount of new risk consistent with long positioning. JPMorgan’s weekly survey, meanwhile, shows net long positions at their highest level since early September.
“The only thing standing between a hike and what markets are pricing at the moment is guidance from the Fed,” said Ed Al-Hussainy, portfolio manager at Columbia Threadneedle. “If there’s a change of opinion in the room, it’s much more likely to move in the direction of a hike.”
The rally in Treasuries has taken the benchmark 10-year yield down to around 5%, reversing a bearish trend in place for most of 2025. Signs of quickening inflation and elevated oil prices lifted the 10-year yield to 5.36% earlier this month, its highest level in more than two decades. Swaps are pricing in a roughly 8% chance for a rate increase in October and more than 90% for one in December.
Traders in the options market have rushed to protect their portfolios against a further move lower in yields, driving the cost of options hedges to their highest level since March last week.
Many hedges have involved the purchase of various call option structures – some targeting a move lower in the 10-year yields over the coming weeks to around 4.6%. The options call-put skew has moved sharply to favor calls, signaling traders are now paying a premium of hedging lower yields versus higher yields.
Here’s a rundown of positioning indicators across the rates market over the past week:
In the week to Oct. 26, investor long positions rose 6 percentage points, with neutrals dropping 4 percentage points and shorts falling 2 percentage points. The outright long positions are now at the greatest in a month while the net long position is the most since Sept. 8.
Across SOFR Dec26, Mar27 and Jun27 options, there was a large amount of new risk added over the past week via Dec26 95.75 puts, while open interest also rose in the 96.25 Mar27 calls after recent flows including an outright buyer in the strike in around 30k for new risk over the past week.
The 96.25 strike remains the most populated across Dec26, Mar27 and Jun27 options with Dec26 and Mar27 open interest elevated in the level. In the Mar27 options, there remains a heavy upside position via SFRH7 96.25/97.00 2x3 call spreads which have been bought over the past couple of weeks. Last week also saw a buyer of Mar27 96.25 calls outright in around 40,000 which open interest also showed as new risk.
The premium to hedge Treasury options has flipped over the past week to calls vs. puts, signaling traders paying a higher price to hedge a rally in Treasuries and lower yields from current levels over a bond market selloff. In the long-bond futures, premium to hedge calls last week reached the highest since February.
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