Trends Fund is heavily betting on stubborn inflation, with record bond shorts waiting for tonight's CPI "ruling"!

On the eve of the release of the U.S. inflation data for July, the global bond market is witnessing a historic tug-of-war between bulls and bears. Data from UBS Group indicates that commodity trading advisors (CTAs), who track market trends, have doubled their short positions in bonds by the end of July compared to two weeks prior, and these bets have remained elevated since. According to UBS strategist Nicolas Le Roux, for every one basis point change in the yield of 10-year U.S. Treasuries, the P&L exposure for CTAs amounts to approximately $300 million, the highest level recorded since UBS began tracking this data in 1990. This bond sell-off, driven by high oil prices, rising rate hike expectations, and a surge in government borrowing, has pushed the yield on 30-year U.S. Treasuries to its highest level since 2007. As of Tuesday's close, the yield on 30-year Treasuries remained at around 5.25%. 1.29 million net short contracts: A self-reinforcing momentum bet The starting point of this epic short bet was a wave of bond selling sparked by inflation concerns. In May 2026, the yield on 10-year U.S. Treasuries surged above 4.6%, reaching its highest level in over a year, impacting numerous fixed-income portfolios and validating the bearish rationale: persistent inflationary pressures, the Federal Reserve maintaining a hawkish stance, and a timeframe extending far beyond what market participants had previously expected. Trend-following fundsnamely CTAsare essentially momentum trading machines. They do not form independent subjective judgments about the economy but trade based solely on price signals. When bond prices continue to fall, this trading exhibits self-reinforcing characteristics: more funds flow into the same direction, further driving down prices and reinforcing the trend signal, attracting more short sellers. By the end of July, this negative feedback loop had created historically large short positions. Exchange data shows that trend-following hedge funds and leveraged investors have established 1.29 million net short contracts on U.S. Treasury futures, the largest scale ever recorded. The shorts are not concentrated in a single maturity but are spread across multiple maturity segments of the Treasury yield curve, further amplifying overall risk exposure. UBS data indicates that by the end of July, CTAs had doubled their underweight positions in bonds compared to two weeks prior, and these holdings have remained relatively stable since. It is estimated that assets managed by CTAs exceed $400 billion. Bank of America strategists also monitor the extremely bearish CTA positions, noting that this group remains in a state of aggressively shorting, particularly concentrated in short-term government bondsmaking Wednesday's inflation report especially critical. Asymmetric risk: Crowded shorts face short-squeeze pressure An excessively lopsided positioning carries a significant reversal risk. Phoebe White, head of U.S. interest rate strategy at UBS, stated bluntly: The space for further increasing short positions is limited; the risk is clearly asymmetric. She points out that if bonds rise, the likelihood of traders covering their shorts is much greater than the willingness to add to positions when bonds continue to fall. This means that if CPI data comes in mild enough to weaken rate hike expectations for September, the crowded short positioning could trigger a massive covering wave, leading to a sharp rebound in bond prices and a rapid decline in yields. Conversely, if CPI data comes in hotter than expected, the room for adding to short positions is limitedthis very asymmetry represents the greatest risk facing the market. Including Meghan Swiber, Bank of America strategists wrote in a report on Monday: If the data does not support a September rate hike, it could challenge crowded bearish positions, especially given the large size of CTAs short positions and the low allocations of active funds. Following the weaker-than-expected non-farm payroll data released last Friday, White and her colleagues advised clients to buy two-year U.S. Treasuries. The bullish rationale includes signs that inflation may have peaked, and the extremely crowded short positions themselves could provide additional momentum during a bond rebound. CPI determines fate: 50-50 rate hike probability and the market crossroads The July CPI data, to be released tonight at 20:30 Beijing time, will directly determine the fate of this historically sizable short position. Dow Jones consensus market expectations show: overall CPI is expected to rise 0.1% month-on-month and 3.4% year-on-year; core CPI is expected to rise 0.2% month-on-month and 2.5% year-on-year. Both year-on-year figures are down 0.1 percentage points from June. Notably, the month-on-month growth rate will revert from June's -0.4% to positive growth, reflecting a narrowing decline in energy prices and a rebound in some inflation components. Goldman Sachs' economic team has a more dovish forecast, expecting the core CPI to rise 0.19% month-on-month (below the market consensus of 0.2%) and overall CPI to rise only 0.05%. Goldman also warned that rising oil prices would make it difficult for the market to relax entirely. J.P. Morgan projected five different scenarios, with the most likely outcome (40% probability) being core inflation between 0.2% and 0.25%, expected to drive the S&P 500 index up by 0.25% to 0.75%. Deutsche Bank expects month-on-month CPI to record 0.15%, with core CPI possibly rising by 0.26%. Bank of America analysts believe that if inflation data unexpectedly comes in below expectations, the U.S. dollar could react more strongly, as this would largely eliminate the possibility of a Fed rate hike in September. CME FedWatch data shows that as of August 12, the market estimates the probability of the Fed keeping rates unchanged in September at 52.0%, while the probability of a 25 basis point rate hike is at 48.0%. This probability has gradually decreased from nearly 80% earlier in the month and currently sits at a critical 50-50 juncture. Last Friday, following the release of weaker-than-expected non-farm payroll data, White and her team advised clients to buy two-year U.S. Treasuriesalongside evidence of inflation possibly having peaked, the extremely crowded short positions in bonds have also become a key factor supporting their bullish decision. The yield on 30-year U.S. Treasuries hit its highest level since 2007 last month and has since remained around those elevated levels. As of Tuesday's close, the yield on 10-year Treasuries was at 4.6904%, while that on 30-year Treasuries was at 5.2413%. Tonight, if the data is mild, the crowded short positions will face short-squeeze pressure, potentially leading to a sharp rebound in the bond market; if the data is hot, the room for adding to short positions will be constrained, but expectations for a September Fed rate hike will be further solidified. Regardless of the outcome, this bond game dominated by $400 billion in trend funds will reach a critical moment of judgment tonight.