Investors have taken bearish positions on U.S. Treasury bonds ahead of the Fed's decision

Investors in the government bond market have taken "bearish" positions ahead of a likely interest rate hike by the Federal Reserve, according to Bloomberg. Market participants expect the sell-off in Treasury securities—which has pushed yields to nearly two-decade highs —to continue.

According to a JPMorgan survey, traders have been increasing their short positions (betting on a decline) at the fastest pace since the beginning of 2025, Bloomberg reports. Market positioning indicates that investors expect bonds to fall further and show virtually no interest in buying on dips, the agency explains.

In federal funds rate futures, a single large short trade can result in a profit or loss of $1.9 million for a trader for every basis point change in the underlying contract, Bloomberg reported. Swaps are currently pricing in a tightening of the Fed’s monetary policy by approximately 50 basis points by the end of the year, including the September meeting, Bloomberg explains.

“Over the past week, we’ve seen a rapid build-up of short positions as the market follows rising yields,” Citi strategist David Bieber noted in a Bloomberg report. According to Bieber, short positions “are at tactically extreme levels.”

On Tuesday, September 15, the benchmark yield on 10-year Treasuries jumped to its highest level since 2007 as traders braced for a Fed rate hike. Meanwhile, the yield on 2-year Treasuries reached its highest level since 2024. On September 16, U.S. yields edged lower.

A survey of investors conducted by Deutsche Bank showed that market participants believe a rate hike at this time would likely raise yields only slightly in the short term, but if the regulator keeps rates at their current level, long-term yields will rise more sharply, Reuters reports.

"Bearish" sentiment prevails ahead of the Fed's decision: Wall Street estimates the probability of the central bank’s first rate hike since 2023 at more than 90%—a level of confidence that has been borne out by history for decades, according to Bloomberg. The agency explains that this growing confidence in the regulator’s policy tightening stems from surging oil prices due to military conflicts, signs of a resurgence in inflation, and fiscal concerns.

The Fed is under “enormous pressure” to raise rates by 25 basis points, said Jason Thomas, head of global research and investment strategy at Carlyle, in an interview with Bloomberg TV. “People have been hurt by this overall rise in prices. Living standards have declined, and I think the Fed needs to take its mandate to ensure price stability seriously,” he noted.

Failing to raise rates—or even raising them, followed by a lack of clarity regarding next steps — could prompt traders to demand even higher yields on long-term bonds to hedge against inflation, while simultaneously dragging down shorter-term securities, which are closely tied to Fed policy, Bloomberg notes.

"Ahead of the Fed meeting, market sentiment remains skewed toward the 'bearish' side. Short positions have built up across the entire yield curve; asset managers have mostly reduced their long positions or increased their short ones, and there are still virtually no signs of buying up discounted securities based on duration,” the agency quotes Bank of America strategists Megan Swiber and Eleanor Xiao as saying.

Rising yields on government bonds are driving up the cost of borrowing across the U.S. economy, Reuters notes. However, analysts believe the Fed is unlikely to step in to rescue the Treasury market, as the U.S. Treasury Department has done.

Regulatory chief Kevin Warsh “values the Fed’s credibility—and his own—very highly,” said Lou Crandall, chief economist at Wrightson ICAP. The Treasury Department has undermined its reputation through its actions in the market, and the Fed chair “will not want to let it get dragged into this,” he believes. “The stakes are even higher for the Fed than for the Treasury Department,” the economist added.

“The [U.S.] administration could, in theory, push the Fed to launch some form of quantitative easing or yield curve control, essentially seeking cheap budget financing and financial repression,” says Mark Sobel, a former Treasury Department official who served under both Republican and Democratic administrations and is now head of the U.S. office of the think tank OMFIF. But, like Crandall, he believes that Warsh will resist such interference.

This article was AI-translated and verified by a human editor