Bond Investors Short U.S. Treasuries Ahead of Fed Meeting

Bond investors have significantly increased short positions in the U.S. Treasury market in anticipation of the Federal Reserve System September meeting. This bearish shift follows rising inflation risks, higher oil prices linked to conflict in Iran, and ongoing concerns regarding U.S. fiscal policy.

Market volatility pushed the 10-year Treasury yield to its highest level since 2007 on Tuesday, while the two-year yield reached its highest point since 2024. Market participants are currently pricing in a more than 90% probability of a 25-basis-point interest rate increase, which would mark the first U.S. rate hike since 2023.

Data from JPMorgan and CME Group show a sharp decline in net long positioning and a surge in Treasury futures shorts. A Treasury client survey from Chase Bank indicated that short positions increased by 10 percentage points in the week ending September 14. To hedge against further sell-offs and inflation risk, traders are increasingly utilizing SOFR and Treasury options. Jason Thomas, head of global research at The Carlyle Group, stated the Federal Reserve is under "enormous pressure" to raise rates.