(Bloomberg) -- Bullish bets in US Treasuries are vulnerable to a sharp reversal if the Federal Reserve takes a more aggressive stance at its upcoming monetary policy meeting.
While investors are pricing only a slim chance that the Fed will lift interest-rates on Wednesday, hawkish messaging from Chairman Kevin Warsh on key issues like inflation could push them to reassess how high the central bank will ultimately lift borrowing costs. That stands to spur a painful unwind in the long positions traders have amassed during a recent haven rush into Treasuries.
“Ahead of the FOMC, the big change has been the market flipping into longs tactically in both Treasuries and European bonds,” wrote David Bieber, a strategist at Citigroup. Traders have chased the gains by building bullish positions, even though the market remains structurally short, he added.
CME Group open interest data show traders whittling down short positions in Treasuries over the past week while placing bets that the gains — driven by worries over the sustainability of the artificial intelligence trade and stress in French bonds — will continue.
Huge position reductions across Treasury futures, especially in those tied to the 10-year note, were seen on Friday. The day before, as Treasuries notched their best session in more than two years, the same tenor saw a large amount of new risk consistent with long positioning. JPMorgan’s weekly survey, meanwhile, shows net long positions at their highest level since early September.