(Bloomberg) -- CTA positioning from a tactical standpoint has recently been seen at a ‘max short’, though evidence in futures data suggests that an unwind could be underway, leaving Treasuries at risk of a short-covering rally in the near term. 

This comes at a point where a continued selloff in the front-end of the curve may start to find road-bumps, as Fed-dated swap contracts close in on aligning with the forecast of Federal Reserve members for three rate cuts by the end of this year. 

The unwind seen over the past couple weeks, of about 500,000 10-year note-equivalent futures, has also raised the question as to whether this is more of a signal of fading demand for basis-trade positioning. 

Treasuries Basis Trade Shows Signs of Waning, Deutsche Bank Says

Signals of short positions in the futures market couldn’t be further away from the cash market. Tuesday’s release of JPMorgan’s Treasury client survey shows the number of outright shorts remain at the lowest level since 2012 while the number of long positions actually climbed, shifting out of neutral. 

Here’s a rundown of the latest positioning across the market:

Leveraged Unwinds

CFTC positioning data up to Feb. 20 has shown that leveraged funds — which are typically hedge funds and various types of money managers including registered commodity trading advisers — have been unwinding net short positions across the Treasury futures complex at an aggressive rate, equivalent to roughly $33 million per basis point in cash risk. Overall net shorts among leveraged funds in terms of 10-year note futures equivalents now sit at about 6.7 million contracts, compared with a peak of about 7.2 million seen in January. 

Meanwhile asset managers have been covering net long positions over the past three weeks, for a combined 525,000 10-year note futures, equivalent to about $34 million per basis point in risk. 

Different Story in Cash

JPMorgan Chase & Co.’s latest Treasury client survey released Tuesday shows short positions remaining at the lowest in more than 10-years, as opposed to positioning among CTAs and leveraged funds in the futures market, where net short positions are elevated. The survey also showed long positions climb 4ppts on the week up to Feb. 26.   

Bearish Skew

In the options market, traders continue to pay a higher premium for hedging a bond market selloff and higher yields versus current levels, most notable in the long-bond contract. The premium paid on some of the long-bond puts may be starting to reflect potential for a cheapest-to-deliver shift in the long-bond futures contract and hedging around such a scenario. 


Most Active SOFR Options  

Some heavy liquidations seen over the past week in SOFR options include large open interest drops in Sep24 96.50 calls, Mar24 94.75 puts, Jun24 95.50 calls, Sep24 95.25 calls and Sep24 95.25 puts. Over the past week, the theme among SOFR options has been the unwinding of upside hedges with call condors in particular focus. 

SOFR Upside Hedges Unwound via Call Condors: Open Interest


SOFR Options Heat-Map

The most populated strike in SOFR options out to the Sep24 tenor remains the 95.00 strike, or 5% rate, where a large amount of Mar24 calls remain. Other populated strikes up to the Feb. 26 CME data also includes 94.75, 94.875 and 95.25. 

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