Macro

Bond Traders Abandon Long Wagers Before Fed Meeting, CPI Data; 10-Year Yields Rise

Traders unwind 80,000 bullish Treasury bets ahead of Fed meeting and CPI data, eyeing potential single rate cut.

By Barry Stearns

6/11, 16:54 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
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Key Takeaway

  • Traders are unwinding bullish bets on US Treasuries ahead of key inflation data and a Fed rate decision, with open interest in 10-year note futures dropping by 80,000 contracts.
  • Yields on 10-year notes rose to near 4.48% from 4.27% post-jobs report, reflecting reduced optimism for multiple rate cuts in 2024.
  • Vanguard and other major investors are adopting cautious positions due to uncertainty over the Fed's actions and persistent inflation concerns.

Traders Unwind Bullish Treasury Bets

In the lead-up to Wednesday's dual macroeconomic events, traders are rapidly unwinding their bullish bets on US Treasuries. The release of inflation data, followed by a Federal Reserve interest-rate decision, has created a rare double-risk scenario that has traders on edge. Futures positioning data indicates a significant shift in sentiment, with open interest in 10-year note futures dropping by around 80,000 contracts since the release of stronger-than-expected labor market data last Friday. This data has dampened optimism about the Fed's potential easing cycle, with investors now fully pricing in just a single rate cut this year.

Nathan Thooft, global chief investment officer for multi-asset solutions at Manulife Investment Management, noted, "We’re less willing to go into this meeting with big bets in either direction. The sizing of our bets in general have come down this year, mainly because of the uncertainty of when and how much the Fed will do."

Higher-for-Longer Rate Expectations

The momentum behind the expectation of higher-for-longer interest rates is evident in both futures and cash Treasury markets. A JPMorgan Chase & Co. survey revealed that net-long positions among Treasury clients have dropped to their lowest in two months. Yields on 10-year notes have climbed to near 4.48% from a low of 4.27% before the recent jobs report, reflecting a sharp reduction in bullish wagers on 10-year note futures.

Citigroup Inc. strategist Ed Acton described the current market positioning as "structurally neutral," attributing it to the tension between above-target inflation and moderating growth. Vanguard Group Inc. has also adopted a cautious stance, with senior portfolio manager John Madziyire stating, "We’ve lightened up our positions before the CPI data and Fed meeting. Every data print is a high vol event for traders."

Rajeev Sharma, managing director of fixed income at Key Wealth, emphasized the need for clear signs of ebbing price pressures before betting on lower interest rates. "The narrative we need to see is inflation sustainably comes down. It’s very likely that the dot plot will bring the rate cuts down to two, but I won’t rule out the possibility of no rate cut in 2024. I don’t believe the Fed is in any hurry to cut rates," Sharma said.

Options Market Signals

The options market linked to the Secured Overnight Financing Rate (SOFR) has seen mixed activity, with traders positioning for both dovish and hawkish outcomes. Recent flows in 10-year options have included continued demand for upside protection at lower prices, with open interest in the July 10-year 111.00 calls rising above 100,000 options, targeting a 10-year yield drop to roughly 4.18%.

Asset managers have also been unwinding their bullish Treasury futures wagers, with CFTC data showing a duration unwind of roughly 40,000 10-year note futures equivalents in the week up to June 4. Hedge funds, on the other hand, have extended their net duration shorts by approximately 168,000 10-year note futures equivalents, pushing overall net duration shorts through 7 million contracts.

Kevin Flanagan, head of fixed income strategy at WisdomTree, highlighted the market's focus on the Fed's future rate path. "Maybe we get one or two cuts this year, but how many are we going to get next year? That will quickly become the center of attention as we move into the second half of this year," Flanagan said.

Street Views

  • Nathan Thooft, Manulife Investment Management (Neutral on US Treasuries):

    "We’re less willing to go into this meeting with big bets in either direction. The sizing of our bets in general have come down this year, mainly because of the uncertainty of when and how much the Fed will do."

  • Ed Acton, Citigroup Inc. (Neutral on US Treasuries):

    "The pullback in bullish bets after the US employment figures leaves a 'structurally neutral' positioning setup in US Treasuries, a function of the tension between above-target inflation and moderating growth."

  • John Madziyire, Vanguard Group Inc. (Cautiously Optimistic on Treasury market positioning):

    "We’ve lightened up our positions before the CPI data and Fed meeting... every data print being a high vol event for traders."

  • Rajeev Sharma, Key Wealth (Bearish on rate cuts by Fed):

    "It’s very likely that the dot plot will bring the rate cuts down to two, but I won’t rule out the possibility of no rate cut in 2024. I don’t believe the Fed is any hurry to cut rates."