Uncertain Outlook for Interest Rate Policy Leads Bond Investors to Cut Bullish Bets on U.S. Treasuries

According to Zhitong Finance APP, as the market prepares for the Federal Reserve's anticipated meeting to reveal the extent of interest rate cuts in the coming months, bond traders have reduced their bets on U.S. Treasuries over the past week. JP Morgan's weekly U.S. Treasury client survey shows that net long positions fell to the lowest level in two months ahead of Wednesday's Federal Reserve meeting, indicating a weakening bullish sentiment among investors. Although the market's implied expectations for Federal Reserve policy remain stable, swap contract prices suggest that the rate cuts by the Federal Reserve will be slightly below 0.5 percentage points by the end of the year, with cuts potentially starting as early as September.

This change comes amid numerous conflicting factors that have made the Federal Reserve's mid-term policy outlook unclear. Federal Reserve Chairman Jerome Powell is facing pressure from U.S. President Trump to cut rates, and he may also encounter dissent from other Federal Reserve officials this week.

Meanwhile, the U.S. economy has shown resilience under the pressure of Trump's trade war, which also supports the bearish view on U.S. Treasuries, as interest rates may remain high for a longer period, continuing to put pressure on Treasury prices. Recent agreements reached between the U.S. and the European Union and Japan have alleviated some uncertainty and strengthened the rationale for the Federal Reserve to maintain higher borrowing costs.

Brendan Murphy, head of North American fixed income at Insight Investment Management, stated, "To strengthen the bullish logic, investors need to see evidence of a deteriorating macro environment and rising unemployment, which seemed more likely a month ago."

In the spot market, JP Morgan's client survey for the week ending July 28 found that longs decreased while shorts reached the highest level since June 2; neutral positions remained unchanged. The overall net long position is at its lowest since May.

One of the recent bearish bets is a put spread on the September 2025 SOFR futures contract made on Tuesday, betting that the implied rate of that contract will rise from the current approximately 4.16% to the current effective federal funds rate of 4.33%, reflecting a weakening expectation for a rate cut in September. On Tuesday, the flow of funds in the U.S. Treasury futures market also included a large bet on the flattening of the yield curve between the 5-year and 20-year, which typically occurs when expectations for rate cuts further diminish.

Additionally, as the yield on the 30-year U.S. Treasury fell to about 4.86% on Tuesday, the premium that investors are willing to pay for put options on 30-year Treasuries has further narrowed. This so-called option "skew" had once dropped to an extreme level in mid-July, when the market's preference for put options was far higher than for call options, and is now approaching the upper end of that indicator.

According to the latest data from the U.S. Commodity Futures Trading Commission (CFTC) as of July 22, asset management institutions have reduced their positions in U.S. Treasury futures for the second consecutive week. At the same time, leveraged funds and speculators have also decreased their net short positions in classic long-term bond contracts. Asset management institutions reduced their net long positions in U.S. Treasury contracts across various maturities by a total of $23.5 million, with the reduction mainly concentrated in the 5-year and classic bond contracts. Leveraged funds and "non-commercial" cross investors reduced their short positions in classic bonds by $5 million and $6.5 million, respectively.