Treasury Bets Are Diverging on Uncertainty Over the Fed’s Rate Path

Uncertainty over the Federal Reserve’s interest-rate path is widening the gulf between wagers on the Treasury bond market’s direction.

(Bloomberg) — Uncertainty over the Federal Reserve’s interest-rate path is widening the gulf between wagers on the Treasury bond market’s direction.

The latest JPMorgan Chase & Co. Treasury client survey shows a sharp drop in neutral positions as long bets rise to most since October and shorts hit the highest in nearly two-months. Meanwhile, in the futures market hedge funds have piled on wagers that prices will drop as rates head higher, pushing their net short position in 10-year note contracts to the most since 2019.

The divide in the market was underscored by recent trade ideas from Goldman Sachs Group Inc. and TD Securities — with Goldman saying that the market is pricing in rate cuts too aggressively and TD arguing the opposite.

Here’s a rundown of positioning in various corners of the bond market:

Cash Treasuries

JPMorgan’s survey shows building conviction on both sides of the debate. As a result, both short and long positions rose on the week, knocking neutrals to lowest since September.

Hedge-Fund Shorts

Banks’ strategic trade recommendations over the week included opposing views from TD Securities and Goldman Sachs, who recommended using SOFR Sep23/Sep24 contracts to bet on a flatter or steeper yield curve, respectively. Meanwhile, the latest Commodity Futures Trading Commission positioning data up to April 11 showed hedge funds extending net short positions in 10-year note futures to most since July 2019.

Options Skew

Over the past week the options skew on 10-year note futures has gravitated back toward neutral from positive, a sign traders are paying less premium to hedge a rally in Treasuries and added premium to hedge a selloff.

US 10-Year Open Interest

In options on 10-year Treasuries expiring in June, open interest remains elevated in 112.00 and 114.00 call strikes, a bullish structure, suggesting a $60 million call spread wager placed on March 14 remains active. The positioning targets a yield of around 3.6% ahead of the expiration on May 26 and it’s already slightly below that level.

SOFR Heat Map

The 95.00 strikes in June, September and December 2023 contracts remain elevated. Positioning around the strike has historically included a June 95.00/96.00 1×2 call spread, a June 95.75/95.50/95.25/95.00 put condor and 95.00/94.75/94.50 put flies in both September and December tenors. 

More stories like this are available on bloomberg.com

©2023 Bloomberg L.P.