Since a resilient September jobs report late last week, bond traders have been abandoning their long positions across multiple futures contracts linked to the Secured Overnight Financing Rate. That’s signaling an unwind of bullish wagers that hinged on a series of big rate cuts this year and into early 2025.
At the same time, short wagers are starting to emerge. The move has led to the biggest outright short position in the cash market since February 2023, according to a survey of JPMorgan Chase & Co. Treasury clients.
There’s an “appetite for new short risk ahead of this week’s inflation release,” Citigroup Inc. strategist David Bieber wrote in a note on Tuesday.
Open interest data, or the number of positions held by traders in the futures market, has sharply dropped across SOFR futures since the employment report. In the December 2024 tenor the two-day position reduction has amounted to approximately 223,000 contracts, equivalent to $5.6 million per basis point in risk, CME data released Tuesday shows. Over that time the contract has sold off sharply, signaling a wipe out of bullish bets as traders re-priced the central bank’s policy path for this year to less aggressive easing.
The fresh short positions are being formed ahead of Thursday’s key inflation data which can further upend traders’ wagers on monetary policy. The latest consumer price index read is expected to show further deceleration but could still jump start a greater shift into short positions on a stronger read.
Fed swaps are currently pricing in approximately 21 basis points of rate cut premium into the Nov. 7 policy meeting and a combined 50 basis points of rate cuts over the two remaining meetings this year. Prior to the payrolls number, around 66 basis points of combined cuts were priced by the December meeting.
Long positions are also vanishing in the cash market. The latest JPMorgan Treasury client survey showed that last week for the first time since April 2023 traders were net short.
Meanwhile, in the SOFR options market new positions since Friday’s payrolls have been skewed toward hedges targeting a gradual Fed rate cut of a quarter point in November and then a pause in December.