The rapid unwinding of US Treasury futures positions by bond traders, triggered by the Middle East conflict, is nearing its conclusion. This sets the stage for new market bets that will determine whether the recent sharp decline will reverse or deepen further. Prior to the military action between the US and Iran that began on February 28, positioning in the US Treasury futures market was significantly skewed towards bets on lower interest rates. This partly reflected investor concerns about economic growth prospects. However, as the conflict sparked a surge in oil prices, these worries were abruptly replaced by inflation fears, forcing unprepared traders to exit their positions and exacerbating the market sell-off.
According to research from Morgan Stanley, this type of position-driven market dislocation typically subsides within 10 to 15 days. This past Tuesday marked the 17th trading day since the conflict began, with US Treasury yields hovering near multi-month highs. However, yields retreated later that day following reports that the US is seeking a one-month ceasefire agreement with Iran. Shaun Zhou, a Morgan Stanley rates strategist, wrote in a report on Monday, "This brings the market close to an inflection point. The line between position unwinding and a structural shift should become clearer in the coming weeks."
Although the largest wave of position unwinding occurred on March 2, new positions established since then have overall signaled a bearish stance, aiming to bet on further rises in US Treasury yields. David Bieber, a strategist at Citigroup, stated in a Monday report, "We have seen significant new short risk exposure added during the price weakness. Current positioning, both tactical and structural, is characterized by a 'moderately one-sided short'."
In the cash bond market, a JPMorgan client survey released on Tuesday showed a significant increase in neutral positions, indicating high uncertainty about the future direction of US Treasury yields. Regarding the most concentrated area of unwinding, the 10-year Treasury futures have seen the largest reduction in positions since March 2. Over 12 of the past 16 trading sessions, the open interest—representing the amount of new risk held by traders—has cumulatively decreased by 550,000 contracts, equivalent to approximately $36 million of risk per basis point. Calculated on a cash bond basis, this is equivalent to roughly $45 billion in current 10-year Treasuries.
The following is an overview of the latest positioning indicators in the rates market: The JPMorgan client survey for the week ending March 23 showed investors reduced short positions by 6 percentage points, shifting correspondingly into neutral positions (a 6 percentage point increase). Absolute long positions remained unchanged during the week, pushing net long positioning to its highest level since December.
Over the past week, open interest for options with a strike price of 96.625 increased significantly, with flows concentrated on downside protection for year-end. For instance, there were buyers of a 1x2 put spread for December 2026 expiry with strikes of 97.00/96.625. There was also demand for options with a 96.25 strike last week, with increased open interest in call and put options expiring in June 2026—flows included the purchase of an SFRM6 96.50/96.375/96.25/96.125 put butterfly spread over the past week. Trading was also active for options with a 96.50 strike; recent flows included buying an SFRZ6 96.50/96.75/97.00/97.25 call butterfly spread, an SFRM6 96.50/96.375/96.25/96.125 put butterfly spread, and an SFRM6 96.50/96.375/96.3125/96.1875 put butterfly spread.
Overall, for options expiring in June, September, and December 2026, the most concentrated strike price by open interest is 96.50, with significant call and put option risk for the June 2026 expiry still centered around that level. The June SOFR options expire on June 12, one week before the policy statement on June 17. Additionally, there is substantial open interest around the 96.4375 strike; related flows included buying an SFRM6 96.4375/96.50 call spread while selling a 2QM6 97.375 call—a position structured as a call butterfly spread, with volume ratios around 100,000 to 50,000.
Furthermore, the premium levels for options used to hedge US Treasury futures risk have continued to move away from multi-month extremes but still show a clear bias towards put options, particularly in longer-dated structures.
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