The turning point in the bond market is near! The wave of closing positions is coming to an end, and the next trend of US bonds is facing a critical test.

In the wave of sell-offs triggered by the Middle East conflict, the process of bond traders quickly unwinding their positions in US Treasury futures is gradually nearing completion. This paves the way for new bets and will determine whether this market downturn will reverse or deepen further. Just before the outbreak of military action between the US and Iran on February 28, the positions in the US Treasury futures market were clearly tilted towards betting on lower interest rates. This partly reflects investors' concerns about economic growth prospects. However, as the war drove up oil prices, these concerns were suddenly replaced by inflation worries, leading to unprepared traders being forced to exit their positions, further exacerbating the market decline. According to research by Morgan Stanley, these position-driven market distortions typically gradually fade away within 10 to 15 days. Tuesday of this week marked the 17th trading day since the outbreak of the war, with US Treasury yields nearing multi-month highs. However, later that day, as reports surfaced that the US was seeking a one-month ceasefire agreement with Iran, yields retreated somewhat. Shaun Zhou, a rates strategist at Morgan Stanley, wrote in a report on Monday, "This puts the market at a turning point. The boundary between unwinding positions and structural shifts should become clearer in the coming weeks." While the largest unwinding occurred on March 2, subsequent new positions overall released a bearish signal, aiming to bet on further increases in US Treasury yields. David Bieber, a strategist at Citigroup, stated in a report on Monday, "We've seen a significant increase in new short risk exposures during the price weakening process, both tactically and structurally, showing characteristics of 'one-sided moderate bearishness.'" In the cash market, a US Treasury client survey released by JPMorgan on Tuesday showed a significant increase in neutral positions, indicating high uncertainty in the future direction of US Treasury yields. Regarding the most concentrated unwind areas, the unwinding of 10-year US Treasury futures positions has been the largest since March 2. In 12 of the past 16 trading days, the open interest (new risk size held by traders) has decreased by a total of 550,000 contracts, equivalent to about $36 million for every basis point of risk. In cash terms, this is equivalent to around $45 billion of 10-year US Treasury debt. Below is an overview of the latest position indicators in the rates market: According to the JPMorgan client survey as of the week ending March 23, investors reduced their short positions by 6 percentage points and shifted to neutral positions (increased by 6 percentage points). Absolute long positions remained unchanged for the week, resulting in net long positions reaching their highest level since December. In the past week, there has been a significant increase in outstanding option contracts with a strike price of 96.625, with funds focusing on downside protection for the end of the year. For example, buyers have purchased a 1x2 put spread with expiration in December 2026 with a strike price of 97.00/96.625. There has also been demand for options with a strike price of 96.25, including a bearish butterfly spread involving SFRM6 96.50/96.375/96.25/96.125 put options that were purchased in the past week. Overall, in options expiring in June, September, and December 2026, the most concentrated strike price is 96.50, with a significant portion of the risk on both the call and put options in June 2026 concentrated around that price. The June SOFR options will expire on June 12, a week ahead of the policy statement on June 17. Additionally, there are a significant number of outstanding contracts near the 96.4375 strike price, with fund flows including the purchase of SFRM6 96.4375/96.50 call option spread and the sale of 2QM6 97.375 call options - a bullish butterfly spread structure position, with a trading volume ratio of 10:5. Furthermore, the levels of option premiums used to hedge risks in US Treasury futures have consistently moved away from the extreme range of previous months, but still significantly favor put options, especially in longer-term structures.