Bearish Bets on U.S. Treasuries Surge Ahead of Employment Report

Bearish bets on U.S. Treasuries are increasing as traders await the crucial employment report scheduled for release on Friday. This report is anticipated to solidify market expectations regarding the Federal Reserve's aggressive rate cuts at the September meeting. The latest customer survey from a major U.S. bank reflects this pessimistic sentiment, showing a significant shift in bearish positions over the past week, with 30-year U.S. Treasury yields rising to nearly 5% due to fiscal concerns. This marks the highest level of bearish positions since February.

These bets will be tested when the U.S. employment report is released. This contrasts with previous market sentiments, which leaned towards a dovish Federal Reserve and lower yields following a series of weaker-than-expected economic data. If the employment data falls significantly short of the expected 75,000 new jobs, it could strengthen the case for further rate cuts and increase pressure on bearish investors to adjust their positions.

Kathryn Kaminski, Chief Strategist and Portfolio Manager at AlphaSimplex Group, noted that if the data is weak enough to change the narrative, short-term bond yields could see a significant drop. This could act as a catalyst, indicating that the labor market is in worse shape than anticipated.

As investors weigh economic slowdown data against fiscal uncertainties, the spread between long-term and short-term Treasury yields has widened in recent weeks. The 2-year Treasury yield, which closely tracks Federal Reserve policy expectations, reached its lowest level since May on Wednesday. This followed weaker-than-expected reports on U.S. employer hiring and layoffs, leading traders to almost fully price in a 25 basis point rate cut for this month.

Some traders view the recent increase in bearish positions as an anomaly, suggesting that signs of economic growth slowing are temporary. Sean Simko, Fixed Income Investment Management Director at SEI Investments Corp., noted that strong data could drive yields higher more quickly than weak data could drive them lower, unless the data is exceptionally weak.