JPMorgan Chase & Co.'s latest client survey showed that outright short positions in US Treasuries rose to the most since the start of the year in the week leading up to April 1. That bearish sentiment spilled over into this week, helping to drive US 10-year yields to as high as 4.4% on Tuesday, a level not seen since November. 

Reports released in recent days showed strength in manufacturing and jobs, underpinning a narrative of US resilience that has been gaining momentum all year. The latest data, combined with signs of sticky inflation and gains in commodities such as oil, has caused investors to further scale back predictions for the timing and extent of central bank monetary easing and gird for a period of higher-for-longer rates. 

The Treasury market backdrop "is being shaped by rising growth expectations," said Ed Al-Hussainy, a rates strategist at Columbia Threadneedle Investment.

It's a similar story in the Treasury futures market. As bonds slid on Monday, traders amassed new positions across most of the futures strip, indicating a proliferation of short bets, according to data from CME Group Inc. Meanwhile, in the options market, the cost of hedging to protect against a selloff in longer-term Treasuries has climbed to the highest since the end of February, data show. 

When it comes to Fed rate expectations, investors are now pricing in about 65 basis points of rate reductions in 2024, compared to the 75 basis points signaled by the median estimate of projections released after the Fed's March meeting. That's a switch from recent months, when traders' forecasts were more dovish than the central bank's.

With the market leaning so bearish, some traders are starting to take the other side of the bet. Tuesday's activity in both Treasury options and those linked to the Secured Overnight Financing rate — which closely tracks the central bank's key policy rate — included some large bullish wagers. The trades look to target a rally in the so-called belly of the curve — around the five-year maturity area — as well as half a percentage point of Fed rate cuts by the central bank's September policy meeting.

Here's a rundown of the latest positioning indicators across the rates market:

Treasury Clients Short

JPMorgan client short positions rose 7 percentage points in the week leading up to April 1 to the most since Jan. 1 on an outright basis. With long positions dropping 3 percentage points on the week, the net positioning shifted to the least long since Feb. 20.

Hedging Bond Selloff Gets More Expensive

The premium paid to hedge a selloff in Treasuries is on the rise. The cost to protect against yields rising on the long end of the curve reached the most expensive since the end of February during Tuesday's session, as reflected by the so-called put/call skew on long-bond futures. In the Treasury options market, short volatility plays remained popular last week in both five- and 10-year tenors. Tuesday's action has seen a couple of large bullish trades in the five-year tenor.  

De-Leveraging Resumes

The latest CFTC data covering the week leading up to March 26 shows deleveraging continuing among asset managers and hedge funds. Leveraged net short positions in Treasury futures declined for an eighth straight week to the least amount since July. Beyond the macro rate narrative, the deleveraging may also reflect the continued unwinding of basis trade amid a less attractive backdrop for the strategy. Net long positions by asset managers also unwound for a third week in a row. 

SOFR Options Most Active

Over the past week, the most active option has been in the 95.00 strike in tenors out to Dec24. Tuesday's flows have included a buyer of the Sep24 95.00/95.25/95.50 call fly, targeting roughly 50 basis points of rate cuts being priced into the September policy meeting. The popular theme last week was targeting the Fed to skip a June rate cut via expressions such as the Dec24 95.625/95.50/95.25/95.00 "broken put condor."

Fed to Skip June Cut? It's the Popular Play in Options Right Now

SOFR Options Heat-Map

The most populated SOFR strike out to the Dec24 tenor remains the 95.50 targeting a 4.5% yield, where a heavy amount of risk can be seen in the Jun24 calls, Sep24 calls and Dec24 puts. Other populated strikes include the 95.00, 95.25 and 94.875 levels, where both Jun24 calls and puts are highly populated. 

--With assistance from Michael Mackenzie.

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