Unexpectedly high consumer price index (CPI) readings triggered a sell-off, driving Treasury yields across various maturities to their highest levels since at least December. This resulted in losses for investors with long positions who chose to hold on. Traders who were betting on lower yields, representing a majority as of the beginning of this week, now find themselves facing a significant risk from continued positive surprises in US economic data.
According to Bank of America interest-rate strategists Meghan Swiber and Anna Zhang, several indicators suggest that long positions are predominant in the market. These indicators include the duration exposure of commodity trading advisers and the composition of new futures positions, where long positions have dominated in recent months.
Meanwhile, JPMorgan’s latest weekly Treasury client survey revealed the fewest short positions since 2012.
As 10-year yields broke out of their trading range for the year following the inflation data, Treasury options flows included a substantial $20 million premium long volatility trade, which stands to benefit from further increases in yields.
Here’s an overview of the latest market positioning:
- Bond Shorts Disappearing Act: JPMorgan’s survey up to Feb. 12 showed a significant drop in client short positions to the lowest level since August 2012. This shift has been driven by increased uncertainty about the direction of yields, with neutral positions reaching their highest level since January last year.
- Hedge Funds Adjust SOFR Longs: Ahead of Tuesday’s CPI release, hedge funds began covering long positions in SOFR futures. Following the Feb. 2 jobs report, hedge funds unwound net-long positions in SOFR futures by the largest weekly amount since Dec. 5, according to CFTC data up to Feb. 6. Meanwhile, asset managers also reduced net long futures positions from the belly of the curve out to the long-end.
- Bearish Skew: The premium paid to hedge against a sell-off in long-bond futures increased sharply after Tuesday’s inflation data, reaching its highest level since November last year. Some of the premium on long-bond puts may reflect anticipation of a shift in the cheapest-to-deliver bond futures contract and hedging around such a scenario.
- Active SOFR Options: Over the past week, there has been a preference for building new risk in SOFR options, with limited liquidation observed. The most active strikes included the 94.6875 strike, where there was heavy Mar24 put activity, along with the 95.125 strike (driven by Mar24 calls) and the 94.875 strike (driven by Mar24 puts).
- SOFR Options Heat-Map: The 95.50 strike has become the most highly populated out to the Sep24 tenor, with heavy positioning in Mar24 calls and Sep24 puts. Notable flows included a seller of the SFRU4 95.25/95.50 call spread, which saw open interest rise by more than 18k in the 95.50 strike on the day. Other significant flows in the strike include SOFR Mar24 95.50/96.00 call spread and SFRH4 95.25/95.50 call spread.
