“Buy short, sell long” deals in the US bond futures market are reviving, betting that the yield curve is getting steeper

Closing US Treasury futures positions may reignite a popular bond market bet; previously, this bet was hit hard as traders lowered their expectations of the Federal Reserve's drastic interest rate cut. This adjustment is pushing companies to remove their leveraged positions. Some companies are closing short positions on short-term US Treasury bonds, while others are closing long term bonds; it is expected that this will continue to drive the purchase of short-term bonds and the sale of long-term bonds, widening the gap between the two.

This steeper yield curve continued to occur steadily until the end of last month, as short-term interest rates usually fell the most when the Federal Reserve relaxed monetary policy. However, after the monthly employment report highlighted the resilience of the US economy, this move came to a standstill, causing outsiders to wonder how fast the Federal Reserve will continue to cut interest rates.

Citibank strategist David Bieber said the shift has prompted investors to reduce leveraged bets over the past few weeks, “causing positions to be cut rapidly from extreme conditions.”

This phenomenon of closing positions can be seen in changes in open positions over the past week. At that time, the risk of 5-year and 10-year US Treasury contracts was drastically reduced, which indicates that traders are closing positions. This, along with similar trends in long-term bonds, can support a steeper curve by driving the excellent performance of short-term bonds.

Over the past few trading days, there is evidence that as the market rebounded, there were fewer open positions in some markets, and investors bought to close short positions. Bank of America strategists Meghan Swiber and Anna (Caiyi) Zhang said in a report that recent developments have made long-term bond positions “vulnerable and may support further intensification of the bear market.”

Here is an overview of the latest position indicators in the interest rate market:

J.P. Morgan investigation

For the week ending October 15, J.P. Morgan Chase's survey of clients' US Treasury bond positions showed that net longing rose 9 percentage points, reaching the highest level in five weeks. Meanwhile, neutral positions rose 2 percent and short positions fell 11 percent.

The most active SOFR option

The biggest changes in open SOFR options contracts in the past week include increases of 95.6875 and 95.75 in put options on December 24. Previously, there were large purchases of SFRZ4 95.75/95.6875/95.625/95.5625 put options, while the SFRZ4 95.8125/95.6875 1x2 put option spread was also heavily bought.

SOFR options heatmap

Among SOFR options as of June 2025, the 95.50 option remains the most held option in terms of open positions, holding a specific amount of risk in the call and put options on December 24 and the put option on March 25. There has recently been an increase in trading activity around the execution price of 95.75, which is the second highest trading activity after recent capital flows (including SFRZ4 95.75/95.6875/95.625/95.5625 bearish hawk strategies).

CFTC futures positions

According to CFTC data, in the week ending October 8, leveraged funds made up net short positions on approximately 38,000 10-year US Treasury futures. Meanwhile, asset management companies closed about 57,000 10-year US Treasury futures during the same period, turning them into net long positions.

Bond put option premiums rising

The premium paid to hedge against the sell-off of long-term bonds has hit the highest since April, while trading 2-year to 10-year US Treasury bonds is close to neutral. Last week, the yield on 30-year US Treasury bonds surpassed 4.42%, and rising premiums on long-term put options and call options triggered a sell-off. At the same time as the premium is rising, implied volatility is also rising. This week, the MOVE index reached its highest level since December last year.