Extreme bears on U.S. Treasuries assemble! Under the "double squeeze" of oil prices and U.S. Treasury yields, rate hike expectations are maxed out, and the market is betting real money on a new round of tightening.

Title context: Extreme bears on U.S. Treasuries assemble! Under the "double squeeze" of oil prices and U.S. Treasury yields, rate hike expectations are maxed out, and the market is betting real money on a new round of tightening. Text: As of the Asian trading session on September 16, the core contradiction in the U.S. Treasury market has fully shiftedwhether the Fed's return to rate hikes, which is almost fully 100% priced in by the market, can investors' positive confidence in a decline in U.S. inflation and a rapid decline in long-dated U.S. Treasury yields. In addition, with a 25-basis-point rate hike already highly priced in by the market, the Fed's guidance on the number, magnitude, and duration of subsequent rate hikes will become an important factor affecting the repricing of the bond market. According to Deutsche Bank's calculations based on federal funds futures pricing, if the Fed chooses not to raise rates, it would be the "largest dovish surprise" at an FOMC monetary policy meeting since the Fed began announcing its benchmark rate decision at the end of meetings in 1994. Amid the intensifying geopolitical conflict in the Middle East, global energy supply risks are reinforcing expectations of policy tightening. Some media reported on September 14 that the number of ships passing through the Strait of Hormuz per day had fallen to single digits, and the Houthi armed group had recently seized the Greater and Lesser Hanish Islands, further expanding its military threat to Red Sea shipping and even to the vast majority of Saudi oil exports, driving Brent crude oil to continue rising this week and at one point approach the $110 mark, with gains of more than 60% since the U.S.-Iran war at the end of February. These latest developments have made bond investors more worried that the energy shock will prolong the impact of price increases through transportation, production costs, and inflation expectations. Rate hikes cannot directly restore shipping and crude oil supply, but they can suppress demand and constrain inflation expectations; the market is therefore beginning to demand that central banks provide a clearer response path. Morgan Stanley expects the Fed to raise rates in September and December, while TD Securities holds the most hawkish stance, with its strategists expecting the Fed to launch this rate hike cycle in September and raise rates three times in totalby 25 basis points each in September and October, and completing the third hike in January 2027. JPMorgan, meanwhile, expects two rate hikes within the year, but does not believe the Fed will act at every consecutive meeting. This repricing has spread to long-term government bonds globally. On September 15, the U.S. 10-year Treasury yield rose intraday to 5.041%, a new high since 2007; the German 10-year Treasury yield rose to 3.572%, a new high since 2009; and the Japanese 10-year Treasury yield rose to 3.036%, reaching a roughly 30-year high. Pressure on Japanese long bonds was also compounded by expectations for domestic monetary policy normalization and expectations for a new round of large-scale fiscal stimulus being prepared by the Takaichi Sanae government. Therefore, although yields in various countries rose in the same direction, their main drivers did not fully overlap; what they had in common was a focus on persistently high inflation expectations brought about by continuously rising energy prices and a sharp increase in term premiums on long-dated government bonds caused by accelerating fiscal deficit expansion. Oil prices shock the global bond market yield curve! The real main battlefield comes after the Fed's 25-basis-point hike, and the subsequent policy outlook will move the market. The U.S. 10-year Treasury yield, known as the "anchor of global asset pricing," is widely used in the benchmark rates and discount rates applied to U.S. dollar bonds, loans, and equity valuations; its rise will both increase the cost of new financing and, other things being equal, lower the present value of future cash flows. What is noteworthy now is that long-term yields include expectations for future short-term rates and term premiums. Market concerns about inflation persistence and the risk of holding long bonds, together with the possibility that the Fed's anti-inflation credibility could be damaged if it does not choose to raise rates, make it highly likely that long-end yields will remain elevated even after one rate hike is delivered. According to Deutsche Bank's calculations based on federal funds futures pricing, if the Fed chooses not to raise rates, it would be the "largest dovish surprise" at an FOMC monetary policy meeting since the Fed began announcing its benchmark rate decision at the end of meetings in 1994. However, Deutsche Bank also said that judging the gap between the actual decision at a scheduled policy meeting and market expectations is not the same as predicting that financial markets will see their largest decline since 1994. Statistics compiled by institutions and traceable back to 2008 also show that when rate futures markets priced in hike expectations as high as they are now, the Fed delivered hikes in all historical samples. Both of the above core pieces of evidence and the compiled data support the view that "the Fed choosing to raise rates at this week's FOMC meeting is the current baseline scenario," but historical patterns cannot turn a policy decision into a certainty. The more investment-relevant judgment is that when most positions have been built around the same outcome, any decision or wording that deviates from expectations could trigger more abrupt position adjustments than usual. After the Fed's monetary policy decision, the trajectories of short-end and long-end yields may move in different directions. If the Fed raises rates and releases a more sustained tightening signal than expected, short-end yields may continue to rise; the long end, meanwhile, must weigh both higher future policy rates and a more credible anti-inflation commitment, the latter of which may inflation compensation and part of the risk premium. If the Fed unexpectedly chooses not to raise rates, or fails to provide sufficiently clear subsequent policy guidance after a hike, short-end yields may fall as tightening expectations cool; but if investors simultaneously worry that the central bank's anti-inflation efforts are insufficient, long-end yields may instead rise, creating a curve steepening in which the short end falls and the long end rises. Therefore, to judge whether this meeting alleviates pressure on the bond market, one must look at both policy path expectations and long-term inflation confidence; focusing only on the word "rate hike" can easily misjudge the actual market pricing situation. In the view of some veteran Wall Street analysts, a combination more conducive to market digestion is a modest rate hike paired with a clear data-dependent stance, allowing investors to interpret it as a limited and moderate monetary policy adjustment to guard against renewed inflation. If the dot plot and press conference further point to a higher policy rate maintained for longer, corporate financing and equity valuations will need to readjust to an upward shift in the entire rate path, and the pressure will be far greater than from a single 25-basis-point adjustment. The options market has already shown this divergence, namely that the SOFR options market simultaneously features trades positioned for a decline in short-term rate expectations and trades guarding against continued declines in long-term bonds, along with different structures for selling volatility. These trades each carry different risks. To judge the direction of the bond market after the meeting, the key remains comparing the actual policy and subsequent guidance with pre-meeting pricing. Before the meeting, the market had already priced in more than 50 basis points of rate hikes within the year, including September; if 25 basis points are delivered in September, the key focus should be whether remaining hike expectations for the year are higher than the previous level of about 25 basis points. If subsequent policy guidance is weaker than market expectations, some short-term bonds and rate futures may rise, prompting related short covering; long-end bonds will also be affected by changes in inflation expectations and term premiums. If the energy shock persists and the market further upgrades rate hike expectations, bonds may still come under pressure, and crowded short positioning itself does not constitute evidence that yields have peaked. Some funds bought October and November SOFR futures call options to prepare for a scenario of lower short-term rate expectations and higher futures prices; at the same time, long-term U.S. Treasury options still show stronger demand for downside protection. In addition, the sale of about 80,000 June 2027 straddle combinations is a short-volatility structure and cannot be directly classified as the same type of directional bond short. What is more worth tracking now is whether post-decision rate hike pricing for the remainder of 2026 exceeds about 50 basis points, whether long-end yields continue to rise independently, and whether crowded shorts begin to cover. If policy merely meets expectations and anti-inflation confidence improves, some bonds may receive support from covering; if oil prices continue to rise and policy expectations are further revised upward, crowded shorts alone will not be enough to prevent yields on 10-year and longer maturities from continuing to climb. "Extreme" bears descend on the bond market! Big bets that the Fed will deliver on rate hike expectations. Bond traders in the U.S. Treasury market built up large bearish positions before the Fed's meeting decision was released at 2 p.m. Eastern Time on Wednesday (around 2 a.m. Beijing time on Thursday), betting that the selloff that has pushed U.S. Treasury yields to their highest levels in nearly 20 years will continue. As traders positioned for the Fed to raise rates due to inflation concerns, the benchmark U.S. 10-year Treasury yield rose on Tuesday to its highest level since 2007. At the same time, the 2-year Treasury yield hit its highest level since 2024. Market positioning shows that investors expect the bond market to weaken further and have little willingness to buy the dip. JPMorgan's U.S. Treasury client survey showed that over the past week, spot market traders increased short positions at the fastest pace since early 2025. CME open interest data showed that investors increased short positions in U.S. Treasury futures both before and after last week's stronger-than-expected inflation report. In the federal funds futures market, a bearish block trade's underlying contract could generate $1.9 million in profit or loss for every one-basis-point move. Swap market pricing shows that, including the September meeting, the Fed will tighten by a cumulative total of about 50 basis points over the remainder of this year. Citi strategist David Bieber said: "Over the past week, as the market chased the move higher in yields, we saw a rapid increase in short positions." He added that short positioning has "reached extreme levels tactically." The chart above shows expectations for the Fed's policy paththe swap market has almost fully priced in a 25-basis-point hike in September and expects two hikes within the year. Note: Expectations are calculated based on overnight index swaps linked to Fed meeting dates. These bearish positions appeared before the Fed meeting. Wall Street pricing currently shows more than a 90% probability that the Fed will implement its first rate hike since 2023; experience over the past decades shows that such a high degree of conviction has been validated by actual decisions. War-driven oil price spikes, signs of rebounding inflation, and fiscal budget concerns have jointly reinforced this conviction. Jason Thomas, head of global research and investment strategy at The Carlyle Group, said in an interview with Bloomberg Television that the Fed is under "tremendous pressure" to raise rates by 25 basis points. He said: "The cumulative rise in prices has already hurt people. Living standards have fallen, and I think the Fed must seriously fulfill its responsibility to maintain price stability." If the Fed does not raise rates, or even if it does raise rates but does not clearly state whether it will raise further, traders may demand higher yields on long-term bonds to guard against inflation risk; at the same time, short-term bond yields that closely track changes in Fed policy may fall. Some market participants have already positioned for the latter scenario: in Tuesday's short-term rate options trading, demand surged for October and November low-price call options on futures contracts linked to the Secured Overnight Financing Rate. This is also an instrument heavily influenced by the monetary policy outlook. However, this is still a minority view at present, and the broader SOFR options market is still hedging against the risk that near-month futures contracts price in further rate hikes over the coming months. During Asian trading on Wednesday, the U.S. 10-year Treasury yield edged down one basis point to 4.99%. Bank of America strategists Meghan Swiber and Eleanor Xiao wrote: "Positioning remains skewed bearish ahead of the Fed meeting. Short positions have been established across the yield curve, asset managers have mostly reduced longs or added shorts, and there is still little sign of dip-buying in duration assets." The following is an overview of various positioning indicators in the rates market over the past week: JPMorgan U.S. Treasury Client Survey As yields continued to grind higher, JPMorgan clients actively increased short positions. In the week ended September 14, the share of shorts jumped 10 percentage points, mainly from a shift out of neutral positions, with the neutral share falling 8 percentage points. At present, the survey covering all clients shows the net long share fell to its lowest level in about four months. The chart above shows JPMorgan's U.S. Treasury all-client positioning surveythe share of investor shorts jumped 10 percentage points in a week. SOFR Options Positioning In December 2026, March 2027, and June 2027 SOFR options, a large amount of new risk exposure appeared at the 95.4375 strike, mainly from a large short-volatility position established by selling June 2027 straddle combinations. Across Friday and Monday trading sessions, about 80,000 combinations were accumulated in total, involving more than $100 million in premium. About 30,000 straddle combinations were newly sold on Friday, followed by about 50,000 of the same straddle combinations sold on Monday. The June 2027 SOFR options will expire on June 11 next year. The chart above shows the most actively traded SOFR option strikes, with weekly net changes in open interest by strike: top five versus bottom fivedata covers changes in open interest by strike over the past week. This table shows the net change in SOFR option open interest over the past week, with the 95.4375 strike seeing the largest net increase. As mentioned above, traders sold about 30,000 and 50,000 June 2027 straddle combinations on Friday and Monday respectively, totaling about 80,000 combinations and involving more than $100 million in premium. The core of this is simultaneously selling call and put options at the same strike to short volatility: for a combination without additional hedges, the closer the underlying futures price is to 95.4375 at expiry, the more favorable it is to the seller; a large deviation in either direction could cause losses to exceed the premium received. This trade reflects that some funds are willing to take on the risk of two-way fluctuations in future rate expectations. Open interest remains most concentrated at the 96.50 strike, where there are still large December 2026 call positions. After Friday's consumer price index release, a considerable number of new downside protection positions were established, and these positions appear intended to address a scenario in which the market further prices in Fed rate hikes over the coming months. Worth noting are the SFRZ6 95.875/95.8125/95.75 non-standard put tree combination and the SFRZ6 95.9375/95.8125/95.4375/95.3125 put condor combination, which traded very actively. The chart above shows SOFR option open interestthe top ten strikes by open interest in the December 2026, March 2027, and June 2027 tenors. This chart, combined with the latest slightly stronger-than-expected core CPI data and additional inflation data showing that U.S. inflation is still heating up, highlights that some traders are placing greater emphasis on the risk that Fed rate hike expectations will continue to be revised higher in the coming months and have added corresponding protection. Because SOFR futures prices move inversely to the corresponding rates, the December 2026 put tree and condor combinations are designed through specific payoff structures to address a scenario of rising rate expectations and falling futures prices. At the same time, the 96.50 strike still gathers a large number of call options, though this is only the distribution of existing positions and cannot be directly interpreted as the market broadly betting on rate cuts; however, these bets highlight that some funds' risk management has extended to the risk of further tightening after September. U.S. Treasury Option Skew In hedging transactions for long-term U.S. Treasury futures contracts, premium still leans toward put options: compared with guarding against price increases from current levels, traders are willing to pay higher fees to hedge against the risk of a bond selloff at the long end of the yield curve. For options on 2-year through 10-year U.S. Treasuries, skew continued to hover at levels closer to neutral. The chart above shows U.S. Treasury option call/put skewskew is expressed as the difference in implied volatility between one-month 25-delta call and put options.