Bond traders have significantly increased their bearish positions ahead of the Federal Reserve's meeting, anticipating a continued selloff in Treasuries. This aggressive shorting has pushed the benchmark US 10-year yield to its highest level since 2007, and the two-year yield to its highest since 2024. Market participants expect the Fed to raise interest rates in response to growing inflation worries.
Interest-rate swaps indicate that traders are pricing in more than a 90% probability that Fed Chairman Kevin Warsh and his colleagues will increase the benchmark policy rate by a quarter point from its current 3.5%-3.75% range. This level of conviction has historically been accurate. Swaps are also pricing in approximately 50 basis points of Fed tightening for the remainder of the year, including the September meeting.
This bearish sentiment is evident across various indicators. JPMorgan's Treasury client survey shows a 10-percentage-point jump in short positions in the past week, the fastest pace since early 2025. Investors also added to short positions in Treasury futures, according to CME Group Inc. data. Citi strategist David Bieber noted that short positioning is "tactically extreme," while Carlyle's head of global research & investment strategy, Jason Thomas, stated the Fed is under "enormous pressure" to deliver a 25 basis-point hike due to rising prices and the need to address its price stability mandate.
Bank of America strategists Meghan Swiber and Eleanor Xiao highlighted that "Positioning remains skewed bearish into the Fed. Shorts have built across the curve, asset managers have largely cut longs or added shorts, and there is still little evidence of dip-buying in duration." While a peripheral view suggests some investors are positioning for a potential lack of clarity on future hikes after an initial increase, the broader market is hedging for additional rate hike premiums.
