US Treasury "Extreme Short Sellers" Gather! With Oil Prices and Treasury Yields "Dual Pressure," Rate Hike Expectations Surge, Market Bets Real Money on a New Round of Tightening

According to Zhitong Finance APP, as of the Asian trading session on September 16, the core contradiction in the US Treasury market has fully shifted—the almost fully priced-in expectation of a Federal Reserve rate hike is now centered on whether this will restore investors’ positive confidence in US inflation easing and a rapid decline in long-term US Treasury yields. In addition, as a 25 basis point hike has largely been priced in, the Federal Reserve’s guidance on the number, magnitude, and duration of subsequent rate hikes will become an important factor influencing the bond market's repricing. According to Deutsche Bank's calculations based on federal funds futures, if the Federal Reserve chooses not to hike rates, it would be the "biggest dovish surprise" of an FOMC monetary policy meeting since the Fed began announcing baseline interest rate decisions at the end of meetings in 1994.

Amid worsening geopolitical tensions in the Middle East, global energy supply risks are reinforcing expectations of policy tightening. According to media reports on September 14, the number of ships passing through the Strait of Hormuz has dropped to single digits daily. The Houthi armed group recently seized the Greater and Lesser Hanish Islands, further expanding military threats to Red Sea shipping and to the majority of Saudi Arabia’s oil exports, pushing Brent crude prices higher throughout the week and once approaching the $110 mark—over 60% higher since the US-Iran war at the end of February.

These latest developments have made bond investors increasingly worried that the energy shock will prolong price increases through transportation, production costs, and inflation expectations. Rate hikes can't directly restore shipping and oil supply, but they can suppress demand and constrain inflation expectations; hence, markets are calling for clearer central bank response paths. Morgan Stanley expects the Federal Reserve to hike rates in both September and December. TD Securities is among the most hawkish, forecasting the Fed to start this tightening cycle with three hikes—increasing rates by 25 basis points each in September and October and completing the third hike by January 2027. JPMorgan, on the other hand, expects two hikes within the year but does not believe the Fed will act at every meeting consecutively.

This repricing has spread to global long-term government bonds. On September 15, the yield on the US 10-year Treasury rose to 5.041% intraday, a new high since 2007; the yield on the German 10-year bond rose to 3.572%, the highest since 2009; and the yield on the Japanese 10-year bond climbed to 3.036%, reaching the highest level in roughly 30 years. Japanese long-term bonds are also under pressure from expectations of domestic monetary policy normalization and the Kishida Fumio administration's brewing of a new round of large-scale fiscal stimulus. Although the yields of various countries are rising, their main drivers differ, with commonality rooted in persistent high inflation expectations due to soaring energy prices and expanding fiscal deficits leading to increased term premiums on long-term bonds.

Oil price shocks are impacting global bond market yield curves! The real battlefield comes only after the Federal Reserve hikes 25 basis points; subsequent policy outlook will dominate the market.

The US 10-year Treasury yield, known as the "anchor of global asset pricing," is widely used as the reference rate and discount rate in dollar bonds, loans, and stock valuation; its rise both increases the cost of new financing and, all else equal, reduces the present value of future cash flows. Currently, it’s important to note that long-term yields include future short-term interest rate expectations and term premium. Concerns about persistent inflation and risks of holding long-term bonds, coupled with the risk to the Fed's anti-inflation credibility if it doesn't hike, could keep long-term yields at high levels even after a rate increase.

Deutsche Bank's estimates based on federal funds futures show that if the Fed chooses not to hike, it would be FOMC's “biggest dovish surprise” since 1994. However, Deutsche notes that a divergence in projected policy decisions and market expectations does not necessarily predict the biggest market drop since 1994. Compiled institutional data traceable to 2008 also show that whenever rate hike expectations reach current high levels, the Fed delivers on the hike in every historical sample.

The above two core pieces of evidence and datasets support “the Fed hiking at the upcoming FOMC meeting as the current baseline scenario,” but history cannot make policy decisions a certainty. From an investment perspective, the more meaningful observation is that—when most positions are built around one outcome, any deviation in decisions or statements may trigger faster than usual position adjustments.

After the Federal Reserve's policy decision, the trajectories of short-end and long-end yields may diverge. If the Fed hikes and signals stronger-than-expected ongoing tightening, short-term yields may keep rising; the long end will simultaneously weigh higher future policy rates and a more credible anti-inflation commitment, the latter potentially suppressing inflation compensation and some risk premiums.

If the Fed unexpectedly chooses not to hike or fails to provide clear enough forward guidance after hiking, short-end yields may fall as tightening expectations cool; but if investors are also concerned the central bank’s anti-inflation resolve is lacking, long-end yields might rise instead—causing a steeper curve as the short end falls and the long end rises. Therefore, assessing whether this meeting relieves bond market pressure requires looking at both the expected policy path and long-term inflation confidence; focusing solely on the "rate hike" could easily lead to a misjudgment of actual market pricing.

From the perspective of some veteran Wall Street analysts, the combination more favorable for market digestion is a modest hike reinforced by a clearly data-dependent stance, helping investors interpret this as a limited and mild policy adjustment against repeated inflation. If the dot-plot and press conference point further toward higher and more prolonged policy rates, corporate financing and stock valuations will need to readjust to an elevated rate path, with pressure far exceeding that of a single 25 basis point adjustment.

The options market is already reflecting such divergence: the SOFR options market simultaneously sees trades hedging for lower short-term rate expectations and for continued long-term bond declines, alongside different volatility-selling set-ups. These trades each bear distinct risks, so the key to predicting the post-meeting bond market direction remains comparing the actual policy and guidance with pre-meeting pricing.

The market has already priced in over 50 basis points of rate hikes for the year, including September; if a 25 basis point hike materializes in September, attention should focus on whether expectations for further hikes this year exceed the previous estimate of about 25 basis points. If forward guidance is weaker than expected, some short-term bonds and rate futures may rise, prompting short covering; long-term bonds will still be affected by inflation expectations and changes in term premium. If energy shocks persist and the market further raises rate hike expectations, bonds may remain under pressure; crowded short positions alone do not mean yields have peaked.

Some funds are buying call options on October and November SOFR futures to prepare for scenarios where short-term rate expectations are lowered and futures prices rise. Meanwhile, long-term Treasury options still show greater demand for downside protection. In addition, about 80,000 straddle sales for June 2027 were aimed at shorting volatility, not outright directional shorts. Currently, it is more noteworthy to track whether post-decision pricing for rate hikes in 2026 exceeds about 50 basis points within the year, whether long-end yields continue to rise independently, and whether crowded shorts start covering. If policy merely matches expectations and anti-inflation confidence improves, some bonds may find support from short covering; if oil prices continue climbing and policy expectations are further raised, crowded shorts alone are not enough to stop 10-year and longer yields from continuing to rise.

Bond Market Faces "Extreme" Short Pressure! Heavy Bets on the Fed Delivering Hikes

Focusing on the US Treasury market, bond traders established large short positions before the Federal Reserve decision on Wednesday Eastern Time (around 2am Thursday Beijing time), betting that the sell-off pushing yields to near 20-year highs will continue.

As traders brace for Fed rate hikes over inflation concerns, the benchmark 10-year Treasury yield climbed to its highest level since 2007 on Tuesday. Meanwhile, the 2-year yield reached its highest level since 2024.

Market positions indicate that investors expect bonds to weaken further, with little appetite to buy the dip. JPMorgan’s US Treasury client survey shows that last week, cash market traders increased shorts at the fastest pace since early 2025.

CME open interest data shows that, before and after last week’s stronger-than-expected inflation data release, investors increased their US Treasury futures shorts. In fed funds futures, a bearish block trade can generate or lose $1.9 million in profit or loss for each basis point moved. Swap market pricing signals that, including the September meeting, the Fed is expected to tighten by a cumulative 50 basis points for the rest of the year.

Citigroup strategist David Bieber said: “Over the past week, we’ve seen a rapid increase in shorts as the market chases yields higher.” He added that positioning was “tactically at an extreme level.”

The chart above shows market expectations for the Fed policy path—the swaps market has nearly fully priced in a 25 basis point hike in September and expects two hikes this year. Note: Expectations are based on overnight indexed swap calculations tied to Fed meeting dates.

These bearish positions accumulated ahead of the Fed meeting. Wall Street currently prices in over a 90% chance that the Fed will deliver its first hike since 2023 at this meeting; decades of experience show that such high conviction is typically confirmed by the actual decision. Surging oil prices due to war, signs of inflation rebound, and budget concerns together reinforce this conviction.

Jason Thomas, global head of research and investment strategy at the Carlyle Group, said in a Bloomberg TV interview that the Fed faces “tremendous pressure” to raise rates by 25 basis points.

He said, “The cumulative increase in prices has hurt people. Living standards have fallen, and I think the Fed must take its mandate to maintain price stability seriously.”

If the Fed doesn’t hike, or even after hiking fails to clarify whether further hikes are forthcoming, traders may demand higher yields from long-term bonds as compensation for inflation risk; meanwhile, short-term yields, which track Fed policy changes closely, could decline.

Some market participants have already positioned for this scenario: On Tuesday, short-term rate options trading saw surging demand for cheap call options on SOFR-linked futures for October and November. This is also a tool deeply influenced by monetary policy outlook.

However, this remains the minority view; the broader SOFR options market is still hedging the risk that near-dated futures for the coming months price in additional hikes.

In the Asian trading session on Wednesday, the US 10-year yield dipped 1 basis point to 4.99%.

Bank of America strategists Meghan Swiber and Elinor Shaw wrote: “Ahead of the Fed meeting, positioning remains skewed short. Every segment of the curve has built short positions; asset managers mostly cut longs or added shorts, and there’s still barely any sign of dip-buying in duration assets.”

Below is an overview of key rates market positioning metrics over the past week:

JPMorgan US Treasury Client Survey

With yields persistently edging higher, JPMorgan clients aggressively increased shorts. For the week ended September 14, the short ratio soared by 10 percentage points, mainly from a shift out of neutral positions, which dropped 8 points. Currently, the survey covering all clients shows the net long ratio at its lowest in about four months.

The chart above is JPMorgan’s overall US Treasury client positioning survey—investor shorts jumped 10 points in a week.

SOFR Options Positioning

In SOFR options for December 2026, March 2027, and June 2027, the 95.4375 strike saw a large influx of new risk positions, primarily from massive volatility shorting by selling June 2027 straddle combinations. Over 80,000 positions were accumulated in two sessions last week and this Monday, involving over $100 million in option premiums. About 30,000 straddles were sold last Friday, followed by another 50,000 on Monday. The June 2027 SOFR options expire on June 11 next year.

The chart above shows the most actively traded SOFR option strikes with week-on-week net open interest changes: comparing top five biggest increases and decreases—data covers weekly changes by strike.

This table shows the net change in SOFR options open interest for the past week, with the 95.4375 strike seeing the largest net increase. As mentioned above, traders sold about 30,000 and 50,000 June 2027 straddles on Friday and Monday respectively—totaling around 80,000 contracts and representing over $100 million in premiums. This involves selling both calls and puts at the same strike, shorting volatility: if the underlying future’s price at expiry is near 95.4375, the seller benefits; significant moves in either direction can result in losses exceeding premium collected. This trade shows some funds’ willingness to take on risk from future two-way rate volatility.

Open interest remains concentrated at the 96.50 strike, with a large number of December 2026 call positions. After last week’s CPI print, the market added a substantial amount of new downside protection; these positions appear aimed at hedging possible further hikes being priced in over the coming months. Of note is the active trading in SFRZ6 95.875/95.8125/95.75 non-standard put trees and SFRZ6 95.9375/95.8125/95.4375/95.3125 put fly combinations.

The chart above shows SOFR options open interest—the top ten most concentrated strikes for December 2026, March 2027, and June 2027 maturities.

This figure, combined with recently released strong core CPI and more data showing US inflation still heating up, highlights that some traders are placing more importance on the risk of the Fed’s rate hike expectations continuing to be revised upward in the coming months, and are adding corresponding protection. Because SOFR futures move inversely to rates, December 2026 put trees and flies are structured to benefit from rising rate expectations and falling futures prices. Meanwhile, 96.50 strike continues to attract a large amount of call option positioning—though this just reflects legacy holdings, not necessarily a broad market bet on rate cuts, but does illustrate risk management by some funds has extended beyond the September Fed meeting to further tightening risks.

US Treasury Option Skew

In hedging via long-term Treasury futures options, premiums remain biased toward puts: traders are willing to pay more for downside protection against long-end bond sell-offs compared to protection against price rises. From 2-year to 10-year Treasuries, option skew remains near neutral levels.

The above chart shows US Treasury option call/put skew—the skew is calculated as the implied volatility difference between the 1-month 25-delta call and put options.