Crazy Increase in Positions! Betting on the Fed Rate Cut Sets a Historic Record

Bond traders are facing record risks, betting heavily on a rebound in US Treasuries, anticipating the first rate cut by the Federal Reserve in over 4 years. The Federal Reserve will kick off its annual economic symposium in Jackson Hole, Wyoming on Thursday, with leveraged positions in US Treasury futures reaching an all-time high before the event. Fed Chair Powell is set to speak and provide more insights on the central bank's monetary policy path for the remainder of the year. Data from the Chicago Mercantile Exchange Group Inc. (CME Group Inc.) and analysis from Bloomberg indicate that last week, open interest in US Treasury futures, representing the risk taken by traders going long or short, hit a record level equivalent to nearly 23 million 10-year US Treasury futures contracts. In other words, for every one basis point movement in the underlying cash bonds, the risk is approximately $1.5 billion. Meanwhile, there has been a growing number of bullish bets in recent weeks, with calls for significant rate cuts this year and in 2025. Data from the Commodity Futures Trading Commission (CFTC) for the week ending August 13th showed asset managers increasing their net long positions in 10-year US Treasury futures by about 120,000 contracts. Investors' risk exposure in US Treasury futures has reached record levels While most of the leveraged positions are a result of asset managers going long on US Treasury futures, there is also a portion attributed to basis trading, a popular hedge fund strategy where traders profit from the spread between US Treasury cash and futures prices. Given that this strategy involves borrowing in the repo market, if lending conditions tighten, traders may be forced to unwind positions to repay loans. Such rapid unwinding could lead to market volatility in the Treasury market. Traders have been anxious about the timing and scale of the Fed rate cuts, betting on various scenarios that could unfold this year. Just two weeks ago, the forward market still believed the Fed would cut rates by 50 basis points at the September meeting, with the possibility of an emergency cut during the meeting. Currently, the expected rate cut for next month is around 30 basis points. Ahead of the Jackson Hole meeting, signs are emerging in the US Treasury cash market that bullish bets may be starting to unwind. A bond client survey released by Morgan Stanley on Tuesday showed that the bank's clients' net long positions decreased to the lowest level in a month