Strong employment "extinguishes" July rate cut expectations, U.S. Treasury bond bulls retreat!

After last week's strong employment data completely overturned market expectations, U.S. Treasury futures traders are significantly closing long positions, pushing U.S. Treasury yields further higher.

On July 9, it was reported that the risk exposure held by U.S. Treasury futures traders, i.e., open contracts, has sharply declined in the past few trading days. On the day of the non-farm payroll announcement last Thursday, statistics showed that traders sold $7 billion worth of 10-year U.S. Treasuries.

Reports indicate that traders had previously built up a large number of long positions in U.S. Treasuries before the employment data was released, expecting weak data to support rate cut expectations, but the reality was completely opposite. Citigroup strategist David Bieber stated:

Strong non-farm employment data drove the market to reduce the July rate cut expectation to zero, and long positions being closed pushed bond prices down.

Meanwhile, the upcoming $39 billion 10-year U.S. Treasury and $22 billion 30-year U.S. Treasury auctions may further squeeze longs, especially if signs of weak demand appear.

Large-scale Long Position Liquidation Intensifies Yield Upward Pressure

On the day of the non-farm data release last Thursday (July 3), approximately $5 million of risk exposure per basis point linked to 10-year U.S. Treasury contracts was closed, equivalent to traders selling about $7 billion worth of 10-year U.S. Treasuries.

Analysis points out that this deleveraging process has become an important force driving U.S. Treasury yields upward. Traders had bet on weak performance before the strong employment data was released, expecting it to support rate cut expectations, but the reversal of reality put immense pressure on these positions.

According to a previous article mentioned by Wall Street Insight, on July 3, data released by the U.S. Department of Labor showed that the U.S. added 147,000 non-farm jobs in June, exceeding expectations, with a total upward revision of 16,000 jobs for April and May, and the unemployment rate unexpectedly dropped to 4.1%.

This Tuesday, the bond market faced pressure again, with weak global demand for long-term sovereign bonds, mainly due to soaring yields on Japanese long-term government bonds and the potential for the "Big Beautiful Plan" to significantly increase the deficit, leading to a large-scale retreat in global demand for long-term sovereign debt, raising concerns among investors about governments' excessive reliance on long-term bond financing.

Supply Pressure Combined with Positioning Risks

This week's U.S. Treasury auctions will be a key test of the bond market's resilience. The $39 billion 10-year U.S. Treasury auction on Wednesday and the $22 billion 30-year U.S. Treasury auction on Thursday may further squeeze concentrated long positions in the long term.

However, the $58 billion 3-year U.S. Treasury auction result on Tuesday was robust, providing some support for subsequent auctions this week.

CFTC data shows that before last week's employment report was released, asset management companies aggressively increased long positions in U.S. Treasury futures, with net longs in 5-year and 10-year U.S. Treasury contracts reaching record highs.

As of the week ending July 1, asset management companies net added about 582,000 equivalent positions in 10-year U.S. Treasury futures, marking the largest weekly increase since April 2024. Meanwhile, hedge funds net added about 148,000 equivalent short positions in 10-year U.S. Treasury futures Additionally, reports indicate that recent SOFR options flows show that after the release of strong employment data, traders are seeking both upside and downside protection, reflecting an increase in market uncertainty regarding the interest rate outlook.

In the federal funds rate options market, traders are betting that the Federal Reserve will keep rates unchanged for the remainder of the year, which contrasts with the market pricing in a rate cut of about 50 basis points for the remaining four FOMC meetings.

The skew of U.S. Treasury options has shifted towards put options, indicating that traders are once again willing to pay a premium to hedge against bond sell-offs rather than declines in long-term yields.

Recent U.S. Treasury options trades include an $8 million short volatility trade and a $32 million options trade betting on a significant rebound in the bond market