According to the Zhichun Finance APP, bond traders are pulling back, choosing to adopt a more neutral stance before the U.S. Consumer Price Index (CPI) is released on Wednesday. The CPI will play a decisive role in expectations for whether the Fed will cut rates again this month.
JPMorgan's weekly survey released on Tuesday showed that after U.S. Treasury prices rose for three consecutive weeks, clients have shifted from their strongest bullish stance of the year to a neutral stance.
The CPI data for November, set to be released on Wednesday, is expected to show a slight acceleration in both monthly and annual inflation. This report will be a focal point for the market. Fed Governor Christopher Waller stated earlier this month that this data, published before the December 17-18 FOMC meeting, could support keeping rates unchanged, although he leans towards a third consecutive rate cut.
While the swap market expects about an 80% chance of a 25 basis point rate cut by the Fed this month, the resilience of the U.S. economy and concerns that President Donald Trump's policies will reignite inflation have opened the door for bets that the Fed will pause rate cuts at some point. After December 18, the market expects the Fed to cut rates about two more times by the end of next year, each by 25 basis points.
The closely watched federal funds futures market reflecting the Fed's expectations also showed a similar trend this month, with bets on a rate cut by the Fed decreasing. The latest open interest data for January and February futures has declined, indicating that investors are unwinding long positions.
Here’s an overview of the latest position indicators in the interest rate market:
JPMorgan Financial Client Survey
In the week ending December 9, JPMorgan clients shifted their positions to neutral, unwinding long positions while the level of short positions remained stable. During this period, long positions fell by 6 percentage points, with neutral positions increasing by the same margin. Direct long positions dropped back to levels seen weeks ago, while neutral positions reached their highest in two weeks.
U.S. Treasury options premiums are close to neutral.
In the past week, the cost of hedging bond market movements with options remained balanced, with most contracts trending neutral. This means that the cost of guarding against a rebound is the same as the cost of hedging against a sell-off.
Most active SOFR options
In the past week, a series of secured overnight financing rate (SOFR) options saw new positions and liquidations. In terms of new positions, open contracts at strike prices of 95.9375 and 96.125 jumped the most. In the past week, there was a significant liquidation of contracts at a strike price of 95.625.
SOFR options heat map
Among SOFR options expiring in June 2025, the contract with a strike price of 95.50 remains the most popular.
CFTC futures positions
In the week ending December 3, asset management companies increased their net long positions in U.S. Treasury futures, while hedge funds covered their net short positions. In SOFR futures, both types of investors covered their net long positions, turning net short for the first time since July.
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