US Treasury Yields: Trader Positioning After Strong Jobs Report

Futures traders have recently started to scale back their large long bets on US Treasuries, further pushing up US Treasury yields after an unexpectedly strong non-farm payrolls report. This has resulted in significant market shifts, reflecting a state of uncertainty regarding the future path of interest rates.

On Tuesday, the benchmark 10-year US Treasury yield closed at 4.410%, marking a five-consecutive-day ascent. Prior to the jobs data release last Thursday, traders had built up substantial long positions in the Treasury market, anticipating that weak employment figures would reinforce expectations for interest rate cuts. However, the data swiftly shattered these expectations, and the risk exposure held by futures traders, i.e., the number of open contracts, rapidly declined in the following days. This deleveraging process is squeezing profits for investors betting on higher Treasury prices, with the changes primarily concentrated in futures contracts linked to 5-year and 10-year Treasuries.

Last Thursday, in futures contracts tied to the 10-year Treasury, approximately $5 million of risk exposure per basis point of yield was unwound. In other words, long traders opted to exit positions rapidly in the face of adverse market conditions. The total size of these liquidated contracts roughly equates to the equivalent of selling about $7 billion worth of 10-year Treasuries.

This Tuesday, the bond market came under pressure again due to weakening global demand for long-term government bonds, as investors worried about governments over-relying on long-dated debt financing.

Citigroup strategist David Bieber wrote in a note, "The strong payroll print effectively removed any July cut expectations from the market, and the dip in bond prices is coming from the passive unwind of prior long positioning." He added that US Treasury tactical positioning is still "in overbought territory," and that recently built long positions are incurring losses.

Data released by the Commodity Futures Trading Commission (CFTC) on Monday showed that asset managers' long positions in 5-year and 10-year Treasury futures have sharply increased, now standing at record highs. This week will see auctions for $39 billion of 10-year Treasuries and $22 billion of 30-year Treasuries on Wednesday and Thursday, respectively. Weak demand could further exacerbate passive deleveraging pressure for investors with long duration positions. By contrast, Tuesday's $58 billion 3-year Treasury auction saw a good response.

Uncertainty Dominates the Market

Overall, the current interest rate market is in a phase of heightened uncertainty and divergence. Institutions are adopting long-short hedging strategies across different maturities and instruments, reflecting that uncertainty over the Fed's policy path and macroeconomic data continues to dominate market behavior. In the Treasury cash market, JPMorgan Chase clients are simultaneously increasing both long and short positions, indicating a growing divide in the market. Net long positions rose to their highest level since mid-June, suggesting that some investors are still betting on interest rates having peaked and that bonds have allocation value. But at the same time, short positions also rose to their highest level of the month, reflecting that another group of investors remains wary of the risk of a Treasury correction.

In the SOFR options market, trading is concentrated around uncertainty about the direction of interest rates. On the one hand, large buy orders are betting that the Fed will remain on hold this year, in opposition to the current widely held market expectation of a 50-basis-point rate cut. On the other hand, funds continue to deploy call options, indicating continued confidence in a rate cut path. Risk exposure is primarily focused on put options for September and December, reflecting increased concerns about keeping interest rates high this year. On the US Treasury options side, with the bond market under pressure recently, skew has shifted markedly to the downside, as traders are paying a premium to hedge against the risk of rising interest rates, and risk aversion is escalating. At the same time, funds are still using large call option combinations to bet on a market rebound, indicating that some investors believe the bond market may have entered an oversold phase.

From CFTC positioning data, asset management institutions significantly increased medium- and long-duration Treasury futures such as 10-year notes in the week before the non-farm payroll data, and net long positions reached record highs, reflecting the preemptive behavior of institutions before the shift in expectations. Conversely, hedge funds increased short positions, betting that the bond market would continue to come under pressure.