Traders Are Starting to Cash In On Bets for Bigger Fed Rate Cuts

(Bloomberg) -- US Treasuries are at risk of a further selloff as traders in the futures and options markets cash in on their bets for aggressive Federal Reserve interest-rate cuts this year.

After piling into Treasury futures contracts at a rate not seen since 1982, according to CME Group Inc. data, traders are starting to pull back on their dovish bets. Open interest in the Treasury futures market, or the amount of new positions held by traders, fell across most tenors at a rapid clip on Monday, with 10-year note futures slipping from its all-time highs.

Bets that the Fed would cut rates sooner and deeper than previously expected have been stretched since last week’s FOMC policy meeting and weak US jobs report. Between July 23 and Aug. 2, open interest increased approximately 337,000 contracts in the 10-year tenor, equivalent to roughly $22 million per basis point in risk.

The sentiment on rate cuts is also reflected in the cash market. JPMorgan Chase & Co.’s Treasury client survey released Tuesday showed outright long positions rising to the most seen so far this year.

Meanwhile in options linked to the Secured Overnight Financing Rate, which closely tracks the central bank’s policy path, there has been a swarm of liquidations. The move is a signal that traders are taking profits from their earlier bets on larger rate cuts as swaps moved to price in at least one half-point rate cut for the September meeting along with a chance of an inter-meeting emergency rate cut before the next scheduled Sept. 18 decision.

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

Shifting to Long

In the week leading up to Aug. 5, JPMorgan clients increased cash long positions by 4 percentage points, shifting out of neutrals with short positions unchanged. The outright long positions are now the most since Dec. 11 while the net long position is the biggest since March 25.

Expensive Hedges

The premium paid to hedge a Treasuries rally has soared over the past week, as yields have tumbled across the curve. Most notable is in the long-end of the yield curve where the premium on calls over puts has risen to the highest since March 2020.

Unwinding Wagers

Since the aggressive shift in bets on Fed policy last week, which now sees almost a half-point rate cut now priced in for September, traders have unwound call positions across tenors for this year and 2025 in a sign of profit-taking into the dovish repricing. Tuesday’s session has seen some clawback in rate cut premium with the Fed-dated OIS for September pricing in around 40 basis points of rate cuts. During Friday’s and Monday’s session over 1 million SOFR call options have been liquidated with the heaviest amount of position unwinds seen across a range of strikes within the September 2024 calls.

SOFR Options

In SOFR options out to the March 2025 tenor, the 94.875 strike remains the heaviest amount of open interest, due to large positions being added via Sep24 calls and puts.

Net Longs

Leading into the Fed policy announcement on July 31, asset managers extended net long positioning, Commodity Futures Trading Commission data show. The overall net gain across the futures curve on the week up to July 30 amounted to approximately 372,000 10-year note futures equivalents. Most of the position add was seen in the 10-year note futures, for roughly $13.5 million per basis point in risk.