Treasury Futures Traders Shake Up Positioning on Fed Cut Bets

In a dramatic shift, traders in the Treasury futures market are rapidly unwinding their long positions and initiating short wagers, signaling a significant change in their expectations for Federal Reserve interest rate cuts. This move, driven by a resilient September jobs report and a repricing of the Fed's policy path, has led to a substantial reduction in bullish bets on aggressive rate cuts and a rise in short positions.



The JPMorgan Treasury client survey revealed that traders cut longs by 9 percentage points and added 3 percentage points to short positioning in the week up to October 7. This resulted in the biggest outright short position since February 2023, indicating a substantial shift in traders' positioning on Fed cut bets. The Fed swaps market now implies a less than 100% certainty that the Fed will cut at least another half point this year, pricing in about 47 basis points of reductions.



The shift in positioning has had a significant impact on the yield curve and Treasury prices. The unwinding of long positions and the increase in short positions have led to a sell-off in the Treasury market, pushing yields higher. The 10-year yield has risen nearly 30 basis points in the last week, reaching as high as 4.05% on Tuesday, the highest level since the start of August. This rise in yields has led to a decline in Treasury prices, as bond prices move inversely to their yields.



Investor sentiments play a crucial role in the adjustment of futures market positioning. Studies have shown that market emotions, such as fear and optimism, have predictive power for futures returns (Shen et al., 2021). Additionally, futures mispricing has been linked to the level of market sentiment (Corredor et al., 2015). In the context of the Federal Reserve's rate cuts, market sentiment can influence the adjustment of futures market positioning, as seen in the reaction to the Fed's surprise rate cut in December 2024.



As traders continue to reassess their positions in the Treasury futures market, the impact on the yield curve and Treasury prices will remain a key focus. The upcoming inflation data release and the Fed's policy path will likely drive further adjustments in positioning, as investors seek to capitalize on potential arbitrage opportunities and hedge against market volatility.

In conclusion, the shift in Treasury futures traders' positioning on Fed cut bets has significant implications for the yield curve and Treasury prices. Investor sentiments play a crucial role in driving these adjustments, and understanding the dynamics of market psychology will be essential for navigating the ever-changing landscape of the Treasury futures market.