(Bloomberg) — Bond traders are taking on record amounts of risk as they bet big on a rally in the U.S. Treasury market fueled by expectations that the Federal Reserve will cut interest rates for the first time in more than four years.
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The number of leveraged positions in Treasury futures has risen to a record high ahead of the central bank’s annual economic symposium in Jackson Hole, Wyoming, which begins Thursday. At the event, Fed Chairman Jerome Powell will speak and provide insight into the central bank’s monetary policy for the rest of the year.
Open interest in futures, or the amount of risk taken by traders who can take long or short positions, peaked last week at a record of nearly 23 million 10-year note futures equivalent, according to data from CME Group Inc. and Bloomberg analysis. That’s about $1.5 billion in risk per basis point move in the underlying cash notes.
The rise coincides with a surge in bullish bets in recent weeks calling for aggressive rate cuts this year and 2025. Money managers added about 120,000 of their net long positions in 10-year futures equivalents, according to data from the Commodity Futures Trading Commission for the week ended Aug. 13.
While most of the leveraged positions are taken by asset managers long Treasury futures, some of it can be attributed to basis trading, a popular hedge fund strategy in which traders make money on the spread between cash Treasuries and futures.
Because that strategy involves borrowing through repo markets, if lending standards tighten, traders could be forced to liquidate their positions to repay their loans. Such a rapid unwind could create volatility in the Treasury market.
Traders, concerned about the timing and size of the Fed’s rate cuts, have been betting on a wide range of scenarios that could play out this year. Just two weeks ago, the swap market was pricing in a half-point rate cut at the Fed’s September meeting, along with the risk of an emergency cut at the meeting. Currently, about 30 basis points of cuts are priced in next month.
The money market is already showing signs that the once-extended bullish bet may be starting to fade for Jackson Hole. JPMorgan Chase & Co.’s Treasury client survey released Tuesday showed the net long position has been reduced to its lowest amount in a month.
Below you will find an overview of the latest positioning indicators on the interest rate market:
JPM Survey
In the week ending August 19, JPMorgan’s Treasury client survey showed a 6 percentage point decline in long positions, leaving the net position at least long for about a month, while short positions increased 5 percentage points over the week.
Hedging premiums are reduced
The premium paid to hedge market moves continues to narrow toward neutral after rising to favor the call premium a few weeks ago as traders eyed a sustained rally in the bond market. Tuesday’s Treasury options flow included a $5 million premium long-vol bet via a choke buyer in the October options, which expire two days after the Fed’s Sept. 18 policy announcement. Toward the end of last week, the theme of traders targeting higher 10-year yields was seen via some heavy flows around the September and October 10-year put options.
Shifting Currents
While SOFR futures and options volumes have slowed over the past few sessions, flows around the September tenor are now focused on 25 basis point Fed policy moves and away from potential half-point rate cuts at the September meeting. Last week’s flows also appeared to include the unwinding of half-point bets, resulting in some heavy liquidations in a few Dec24 and Mar25 put strikes. The largest payouts over the past week were in the Dec24 97.00 and 96.00 call strikes following the unwinding of an existing 96.00/97.00 call spread structure and the switch to a new 96.50/97.50 position.
SOFR Options Heatmap
In SOFR options through March 2025, the 95.50 strike is now the highest in terms of open interest, after seeing a surge in Dec25 calls during the week via trading in the 96.00/96.50/97.00/97.50 call condor (see details above).
Extending the duration of longs
There were some major positioning shifts for the week ending August 13, with asset managers extending long duration by about 120,000 10-year note futures equivalents and hedge funds going the other way, adding about 315,000 10-year note futures equivalents to the net short duration. Hedge funds’ bearish stance on 10-year note futures pushed the net short position to more than 2 million futures contracts, a record amount.
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