Traders Brace for Inflation Data Amidst Rising Yield Wagers
Traders who have ramped up bets for higher US yields face a test on Wednesday when inflation readings are released.
Market Sentiment
Treasury yields have climbed steadily since Friday's strong jobs report, which fueled expectations of a slower pace of interest rate cuts by the Federal Reserve. Open interest has surged, indicating increased short positions.
Inflation Expectations
Wednesday's inflation report is forecast to show a modest slowdown in consumer prices excluding food and energy, but it could still exceed the Fed's target. This may intensify upward pressure on yields and diminish hopes for rate cuts.
Debt Sales and Trade Tensions
Upcoming sales of $67 billion in US Treasury debt could limit any bond rally. Additionally, concerns about President Trump's tariff policies and trade escalations have raised inflation worries among investors.
Curve Positioning
Short positions have primarily concentrated in the "belly" of the Treasury curve, particularly in five-year note futures. The swaps market predicts just under two quarter-point rate cuts by the Fed this cycle.
Cash Market Indicators
JPMorgan's Treasury client survey shows a shift towards neutrality in short and long positions. However, the overall sentiment remains slightly positive.
Options Trading
Options hedging in Treasuries has returned to near-neutral levels. Short volatility plays have been prominent, including a $10 million straddle sale in March 10-year options.
SOFR Options Heatmap
The most active strike in SOFR options remains at 96.00, with a significant presence of Mar25 calls and Jun25 puts.
CFTC Futures Positioning
Hedge funds continue to increase net duration shorts, particularly in 5-year note futures. Asset managers have remained net duration long.