Ahead of Wednesday’s Federal Reserve policy meeting, bond traders have built heavy short positions, betting that the sell‑off pushing Treasury yields toward multi‑decade highs will persist.

Driven by fears over persistent inflation that could force the Fed to tighten policy, the US 10‑year Treasury yield hit its highest level since 2007 on Tuesday. Meanwhile, the 2‑year Treasury yield climbed to its peak since 2024.

Positioning data points to subdued dip‑buying appetite, as investors brace for further bond price declines. JPMorgan’s Treasury client survey shows that short positions among cash‑market traders expanded at the fastest pace since early 2025 over the past week.

Open‑interest figures from CME Group Inc. reveal investors added short exposure in US Treasury futures around the release of last week’s hotter‑than‑expected inflation print. In federal‑funds futures, a large bearish trade can generate gains or losses of USD 1.9 million per single‑basis‑point move. Swap contracts price in roughly 50 basis points of total monetary tightening from the Fed for the rest of this year, including the September meeting.

Bearish sentiment has gripped markets heading into the Fed gathering. Wall Street consensus puts the odds of the Fed delivering its first rate hike since 2023 above 90% — a market gauge that has proven reliable over past decades. Surging oil prices stemming from conflicts, signs of rebounding inflation, and fiscal‑budget concerns have reinforced this hawkish expectation.

Jason Thomas, Head of Global Research and Investment Strategy at The Carlyle Group, told Bloomberg Television that the Fed faces “immense pressure” to raise rates by 25 basis points.

“Persistent price increases are hurting households. Living standards are deteriorating, and I believe the Fed must earnestly deliver on its price‑stability mandate,” he noted.

Failure to lift interest rates — or a rate hike without clear forward guidance for additional tightening — could compel traders to demand higher long‑dated Treasury yields as inflation compensation, while dragging down short‑term yields that are highly sensitive to Fed policy.

Some market participants have already hedged against this scenario. On Tuesday, short‑rate option flows saw a sharp jump in demand for call options on October and November SOFR‑linked futures. SOFR, the Secured Overnight Financing Rate, is a key benchmark heavily influenced by the monetary‑policy outlook.

Even so, this remains a marginal view. The broader SOFR options complex is pricing and hedging against extra rate‑hike premiums that are set to be baked into near‑term futures contracts in the coming months.

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