(Bloomberg) -- Traders rattled by the rout in long-dated Treasuries are turning more bearish as yields continue to oscillate around a key 5% psychological threshold.
A JPMorgan Chase & Co. survey of traders released Wednesday spotlighted that investors expect the selloff to worsen, keeping yields elevated in the $29 trillion Treasury market. The survey’s all-client category for outright short positions — which includes central banks, sovereign wealth funds, real money and speculative traders — has climbed to the most since around mid-February.
The bearish sentiment comes on the tail of a decline in global long-dated bonds as investors grow concerned about widening government fiscal deficits. The US 30-year yield is lingering around 4.97% after soaring last week to 5.15%, the highest since October 2023, amid the US losing its top credit score, a steep selloff in Japan’s super-long bonds and the passing of President Donald Trump’s tax-bill in the House.
Long-bonds got some relief Tuesday as a global debt rally sent benchmark yields tumbling. However, the 30-year yield still hovering around 5% signals investors remain fickle. That’s being expressed in the options market too, where traders are paying higher premiums to hedge an extended selloff in long-bond futures versus a rally.
“This is a global steepening of the yield curve,” said Leah Traub, a portfolio manager at Lord Abbett & Co. “There are a lot of different nuances to the same story, which is that demand for longer-term securities is diminishing at the same time as supply is growing. That’s going to put pressure on the long end of all these curves.”
Meanwhile, a five-year note auction that drew record indirect demand Wednesday and a two-year auction Tuesday that was also well-received further underscore the disparity between investor interest for shorter-dated debt compared to long-bonds. Traders will next turn their focus to a $44 billion seven-year note sale on Thursday.
Here’s a rundown of the latest positioning indicators across the rates market:
JPMorgan Treasury Client Survey
In the week up to May 27, investor outright short positions increased by 2 percentage points to the most since Feb. 10. The net long position now sits at the least since Feb. 3.
Most Active SOFR Options
Across SOFR options out to the Dec25 tenor, the 94.875 strike has been active over the past week. That’s largely down to the flows, including a large buyer of SFRZ5 95.375/94.875 1x2 put spreads, which also accounts for the gains in open interest seen over the past week in the 95.375 strike.
The 96.50 strike was also well traded due to flows, including an outright buyer of Jun25 calls over the past week at half-tick. Over the past week, a decent amount of liquidation was seen in the 95.75 strike with both Jun25 puts and Sep25 puts seeing a large drop in open interest.
SOFR Options Heatmap
The 95.75 strike remains the second most-populated strike despite a decent amount of liquidation seen over the past week. The 95.625 strike is now most populated in tenors across Jun25, Sep25 and Dec25 options, mostly due to large positioning around the Jun25 puts via the SFRM5 95.75/95.625 put spread, which has recently traded. The top three most-populated strikes still contain a large amount of June 2025 put exposure.
Treasury Options Skew
Traders are continuing to pay increasing premiums to hedge a selloff in the long-bond contracts on both an outright basis and versus the front and belly of the curve. That comes as 30-year yields oscillate at a 5% handle over the past week, touching as high as 5.15% on May 22, helped by a soft 20-year bond sale last week. The skew toward puts in the long-bond contract is now the most in about a month.
CFTC Futures Positioning
For the second week in a row, asset managers aggressively de-leveraged net long positioning in Treasury futures, CFTC data up to May 20 shows. Over the week, asset managers unwound about 168,000 10-year note futures equivalents to the net duration long, following around 214,000 10-year note futures equivalents the week before. The largest amount of de-risking was seen in the ultra 10-year note futures, where about $5.1 million per basis point of long liquidation was seen on the week.
--With assistance from Carter Johnson.