Source: Zhitong Finance
Author: Wei Haoming

Weekly data from the US Commodity Futures Trading Commission (CFTC) shows that at a time when US Treasury yields have recently risen, leveraged funds that use borrowed funds to amplify returns have increased short positions in the US Treasury futures market for the first time in two months. Investors have also increased their bearish bets on the spot market. J.P. Morgan's latest customer survey shows that as of April 8, short positions increased, making clients' net positions neutral rather than net long positions. This is the first time in nearly a year.

US Treasury yields hit a high during the year this week. Earlier, there were signs that the US economy was strengthening. Coupled with the cautious remarks of major central bank governors, traders continued to lower their expectations for interest rate cuts in 2024. Both Friday and Monday's trading sessions showed an increase in short positions based on changes in open contracts, reflecting traders hedging the risk of further increases in US Treasury yields.

However, before tonight's key inflation report comes out, US Treasury traders are already betting heavily on short positions, so much so that they may fall short due to less than expected inflation. On Tuesday, US Treasury bonds recovered some of their recent losses, and yields fell slightly from their high point. Now, traders are waiting for the major US consumer price index (CPI) report for March to be released later on Wednesday. This report will cause a repricing of US Treasury bonds.

Economists forecast that both overall and core US CPI rose 0.3% month-on-month in March. Wells Fargo analysts wrote in an April 5 report that due to such pessimistic market positioning, weak data is likely to trigger a more intense reaction. They wrote: “After the recent poor performance of the bond market, we believe that if the core CPI falls below the 0.3% forecast, the reaction of US Treasury yields will be more intense than when the core CPI rises.”

There are already signs that some investors may be considering closing positions before the data is released. Record bulk trading in short-term interest rate futures boosted short-term securities gains significantly on Tuesday, which appears to be in line with the behavior of a direct buyer.

With yields at a high point during the year, large-scale trading may be an early sign that bears in the bond market are overly tight. Additionally, CFTC data shows that some asset managers have recently been willing to take more interest rate risks.

Here is an overview of the latest position indicators in the interest rate market:

Shorting US Treasury bonds

According to J.P. Morgan's latest survey of US Treasury customers, short positions increased by 2 percentage points, making its clients' net positions neutral for the first time since April 17, 2023. In terms of direct positions, short positions are still the largest since the beginning of the year, while direct long positions are the lowest since February.

Hedge funds rebuild futures shorts

Leveraged funds have expanded their net short positions for the first time since the end of January, according to the CFTC's latest data for the week ending April 2. The additional short positions were equivalent to approximately 171,000 10-year US Treasury futures equivalents. Most of these net short positions were extended to 5-year US Treasury bonds, with a risk weight of $6.8 million per basis point.

On the other hand, asset management companies rebuilt their long-term positions by the largest margin since August last year, adding about 222,000 net long positions on 10-year US Treasury futures.

Hedge bond sell-off costs are high

The premium paid to hedge against the sell-off of bonds remains high. With yields on all term bonds rising this week, the so-called bearish/buy bias premium for long-term bond futures is the highest. This bearish sentiment is reflected in current cycle share market movements, including a series of deals on Monday aimed at 5-year and 10-year US Treasury yields above 5%.

SOFR options trading is active

On Tuesday, the bulk trading volume of US short-term interest rate futures hit a record high and boosted the US Treasury bond market. According to the data, 75,000 guaranteed overnight financing rate (SOFR) futures for December 2024 changed hands through bulk trading. The Chicago Mercantile Exchange (CME) confirmed that this was the largest trading volume for this product to date.

SOFR futures were launched in May 2018 and have become the main tool for betting on interest rates set by the Federal Reserve. A bulk transaction is a privately negotiated, single-price transaction that meets a minimum size threshold. Futures prices then rose, implying that the transaction was initiated by the buyer, while US bond yields fell further to the depreciation.

The most active SOFR options executions in the past week were 95.0625 and 94.9375. Last week's activities included buying 94.9375/95.0625/95.1875 call options on June 24 and 94.9375/95.0625/95.1875 on September 24. There was also a lot of buying in the 94.875/94.9375/95.00/95.0625 bullish range on June 24.

SOFR heatmap

Among December 24 bonds, the highest SOFR is 95.50, with a target yield of 4.5%. A large amount of risk can be seen in June 24 call options, September 24 call options, and December 24 put options. Other intensive exercises include the 95.00, 95.25, and 94.875 levels. Both bullish and bearish levels were very intense on June 24.

Editor/Jeffy