Firm Belief in Fed Rate Hike Tonight! US Bond Market Shows "Extreme Short Positions"

Short positions in the US Treasury bond market have accumulated to rare levels in recent years, as traders are betting that the Federal Reserve will resume its rate hike cycle tonight.

The yield on the 10-year US Treasury bond rose Tuesday to its highest level since 2007, and the 2-year Treasury yield also touched its highest point since 2024. Market pricing shows that Wall Street now assigns more than a 90% probability to the Federal Reserve raising rates by 25 basis points at tonight’s meeting. The interest rate swaps market reflects expectations of a cumulative tightening of around 50 basis points by the Fed for the remainder of the year.

Citi strategist David Bieber said, "Over the past week, as the market chased higher yields, short positions have accumulated rapidly," and plainly stated that the current short positioning "is already at an extreme tactical level."

Bank of America strategists Meghan Swiber and Eleanor Xiao also noted, "Going into the Fed meeting, positioning remains heavily skewed towards shorts, with short positions built up along the entire yield curve, asset managers mostly cutting longs or adding shorts, and there’s little sign of funds buying duration assets at lower levels."

Short positions accumulate rapidly, the fastest pace in recent years

Multiple market indicators show bond traders are ramping up short bets at an unusual speed.

According to JPMorgan’s Treasury client survey, as of the week ending September 14, client short positions jumped 10 percentage points in a single week, primarily due to a shift out of neutral positioning—neutral positions dropped by 8 percentage points during the same period. The overall client survey shows net long positions have fallen to their lowest level in about four months, and the speed of short accumulation over the past week is the fastest since early 2025.

Meanwhile, CME Group data shows that Treasury futures short positions increased both before and after last week’s stronger-than-expected inflation data. In the federal funds futures market, one large short position signals that for each basis point move in the underlying contract, the position would gain or lose $1.9 million.

Oil prices, inflation, and fiscal pressures are all pushing up the odds of a rate hike

A combination of multiple macro factors is driving the market to expect a strong probability of a rate increase.

War-driven oil price surges, signs of an inflation rebound, and concerns over fiscal deficits have all reinforced the view that the Fed must act. Jason Thomas, head of global research and investment strategy at The Carlyle Group, said in an interview with Bloomberg that the Fed is under "enormous pressure" to deliver a 25 basis point hike.

"People have been hurt by cumulative price increases," he said, "the standard of living has already dropped, and I believe the Fed must take its price stability mandate seriously."

Thomas also warned, if the Fed fails to hike rates, or doesn’t provide clear guidance on the path forward after a rate hike, it could push traders to demand higher yields from long-term bonds as a hedge against inflation risk, while suppressing yields on the short end that are closely tied to monetary policy direction.

A minority of traders are betting on "holding steady," but this remains a fringe view

Despite strong mainstream expectations, there are still some hedging operations in the market anticipating the Fed will hold rates steady.

On Tuesday, there were unusual moves in the short-term interest rate options market, with a notable uptick in call option volumes for October and November SOFR-linked contracts. Buying these low-cost options suggests some traders are positioning for a Fed "no hike" scenario as protection.

However, this viewpoint remains in the minority. In the broader SOFR options market, the dominant pricing outlook is still for further downside risk premiums to be priced into front-end futures contracts over the next few months. Skew data from Treasury options reinforces this view—the put premium remains higher than call premium on long-end contracts, reflecting the still-high cost traders are paying to hedge against further yield increases on the long end.

Massive short volatility trade emerges in the SOFR options market

The SOFR options market recently saw a rare large-scale short volatility trade, further revealing that market expectations for the interest rate path are converging.

According to Bloomberg data, in SOFR options for December 2026, March 2027, and June 2027, a large volume of new risk exposure has accumulated near the 95.4375 strike price, mainly from a massive short volatility structure built by selling straddle options for June 2027.

On Friday and Monday, this straddle option saw a total volume of nearly 80,000 contracts, with total premiums exceeding $100 million—about 30,000 contracts opened on Friday and another 50,000 sold on Monday. The option expires on June 11 next year.

In addition, after the CPI data release, the market added a batch of protective downside positions, including SFRZ6 put spreads and put fly strategies, indicating that traders expect the Fed to continue building in rate hike premiums over the coming months.