(Bloomberg) -- Treasury market positioning has become contentious, leaving JPMorgan strategists to explain the decoupling of their investor survey with CFTC’s Commitment of Traders data. 

JPMorgan’s Treasury client survey for the week ended June 5 found the biggest net long since June 2016. Meanwhile, hedge funds had a large short position in Treasury futures equivalent to nearly 6 million 10-year note contracts as of May 30 despite two consecutive weekly reductions, CFTC data show.  

A report by JPMorgan strategists led by Jay Barry said the net long position “is not as pervasive as the headline reading would suggest” nor an impediment to lower yields in the near term. Its divergence from CFTC’s futures positioning reflects increased exposure to swap-spread narrowing trades, among other factors, they said.

Read more: Diverging Rates Positioning Reflects Underlying Exposures: JPM     

Meanwhile, indicators such as the one-month 25-delta call/put skew on 10-year note futures shows traders paying to hedge a Treasury selloff for the first time in months. 

Here’s a rundown of positioning in various corners of the bond market:

JPMorgan Survey Longs Stretched

Client survey found most outright long positions since November 2019, leaving the net long biggest since June 2016. The net long at 22 percentage points has risen sharply since the start of February, when clients were net short 19 percentage points. During this time the 10-year Treasury yield has held a range of approximately 3.25% to 4.09%.   

Futures Positioning Mixed

In CFTC data for the period ended May 30, hedge funds covered short positions for the second week in a row, cutting approximately 50,000 10-year futures equivalent from a net short that remains near 5.8 million contracts. The combined short-covering from hedge funds across the futures curve over the past two weeks has been equivalent to approximately 230,000 10-year futures equivalents. 

Bearish Option Premium Builds

Friday’s sharp selloff spurred by the May jobs report saw the cost of hedging a rally in Treasuries disappear as premium skew shifted toward hedging a further rise in yields, shown by the one-month 25-delta call/put skew turning negative for the first time since the start of March. In Treasury options, standout flow over the past week included a $12.4 million long volatility play via September 2023 10-year option straddles.

SOFR Options Active Before Fed

In SOFR options, recent new positions have been mixed ahead of June Fed policy announcement. This week has seen the emergence of upside protection across June and December 2023 tenors, targeting the central bank to pause rate hikes at the next policy meeting and hedging for additional cuts into the year-end. Among recent directional plays, a $20 million short vol position was seen in December options via SFRZ3 95.25 straddle sales.   

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