Bond investors have built up bearish positions across the US rates market ahead of this week’s Federal Reserve meeting, as rising inflation risks and higher oil prices fuel expectations that interest rates could move higher and Treasury yields remain elevated, according to a report by Bloomberg.
The 10-year Treasury yield climbed to its highest level since 2007 on Tuesday, while the two-year yield reached its highest point since 2024. The moves have been accompanied by a sharp increase in short positioning, suggesting investors remain reluctant to step in and buy government debt following the recent sell-off.
JPMorgan’s latest Treasury client survey showed short positions increasing by 10 percentage points in the week to 14 September, with much of the shift coming from investors previously holding neutral positions. The result left the survey showing its lowest level of net long positioning in roughly four months.
Investors have also added to Treasury futures shorts both before and after last week’s stronger-than-expected inflation data, according to open-interest figures from CME Group.
The positioning reflects growing expectations that the Fed will respond to renewed inflation pressure with higher interest rates. Markets are pricing a more than 90% probability of a 25-basis-point increase at the September meeting, which would mark the first US rate hike since 2023.
Higher oil prices following the Iran conflict, signs that inflation is proving more persistent and concerns surrounding US fiscal policy have all contributed to the shift in expectations.
Carlyle’s head of global research and investment strategy Jason Thomas said the Federal Reserve was under “enormous pressure” to raise rates by 25 basis points, citing the impact of accumulated price increases on households.
For bond investors, the risk extends beyond the immediate policy decision. A failure by the Fed to raise rates, or a hike that is not accompanied by sufficiently clear guidance on further tightening, could produce divergent moves along the Treasury curve.
Longer-dated yields could rise as investors demand greater compensation for inflation risk, while shorter maturities could fall if markets conclude that the central bank is less likely to continue tightening.
Some traders appear to be positioned for such an outcome. Short-term interest-rate options saw increased demand for October and November calls on contracts linked to the Secured Overnight Financing Rate (SOFR), although this remains a relatively limited view compared with the broader market positioning.
SOFR options are also showing substantial new activity further along the curve. In December 2026, March 2027 and June 2027 contracts, significant new risk has accumulated around the 95.4375 strike, including a large short-volatility position involving June 2027 straddles.
Around 80,000 positions were accumulated across Friday and Monday, carrying a combined premium of more than $100m, according to market data. Open interest remains particularly concentrated around the 96.50 strike, where sizeable December 2026 call positions remain.
Following last week’s inflation report, traders also increased downside protection in some short-term rate structures, reflecting expectations that further Fed tightening could be priced into front-end futures in the months ahead.
Treasury options are similarly reflecting caution toward duration. The cost of downside protection on long-dated Treasury futures remains higher than that for upside exposure, indicating that traders are paying more to hedge against another sell-off in longer-maturity government bonds.
By contrast, options skew across the two-year through 10-year maturities remains closer to neutral.
