Traders ramp up Treasury shorts ahead of Fed meeting

Traders and bond investors increased short positions across US Treasury futures and options ahead of this week’s Federal Reserve meeting, driving the 10‑year yield to its highest level since 2007. The two‑year yield reached its highest point since 2024, and markets priced more than a 90% probability of a 25‑basis‑point hike at the September meeting.

A JPMorgan client survey for the week to Sept. 14 showed short positions rose by 10 percentage points to 14% of client positioning, leaving net long exposure at its lowest level in about four months. Much of the added short exposure came from clients who had been neutral the prior week.

Exchange open‑interest figures indicate traders added Treasury futures shorts both before and after last week’s stronger‑than‑expected inflation reading. Short‑term interest‑rate options recorded increased demand for October and November calls on contracts linked to the Secured Overnight Financing Rate, reflecting bets on higher front‑end rates.

Further along the curve, substantial new activity accumulated in SOFR contracts for Dec. 2026, Mar. 2027 and Jun. 2027 around the 95.4375 strike. Market data show roughly 80,000 positions built over two days with a combined premium above $100 million. Open interest remains concentrated around the 96.50 strike, where sizeable Dec. 2026 call positions persist.

Options on Treasury futures indicate traders are paying more for downside protection on long‑dated bonds than for upside exposure, while option skew across the two‑ through 10‑year maturities is closer to neutral. Following the inflation report, some traders increased downside protection in short‑term rate structures.

Higher oil prices after the Iran conflict, signs of more persistent inflation and concerns about US fiscal policy have contributed to market expectations for higher rates. Jason Thomas, head of global research and investment strategy at Carlyle, described the Federal Reserve as under “enormous pressure” to raise rates by 25 basis points, citing the effect of accumulated price increases on household finances.

Market participants cautioned that if the Fed holds off on a hike or raises without clear guidance on further tightening, yields could move unevenly: longer‑dated rates might rise as investors seek greater inflation compensation, while very short‑term yields could fall if markets conclude the tightening cycle is near its end. Some traders have positioned with targeted option structures for that split outcome.

After a multi‑year tightening cycle that paused in 2023, the recent accumulation of shorts in Treasuries and higher hedging costs for long‑duration exposure reflect rapid changes in market positioning as investors reassess the path of US monetary policy and inflation risk.