Trend funds are heavily betting on persistent inflation, with record short positions in bonds awaiting tonight's CPI "verdict"!

According to Zhitong Finance APP, on the eve of the release of US July inflation data tonight, the global bond market is witnessing a historic tug-of-war between bulls and bears. Data from UBS Group shows that Commodity Trading Advisors (CTAs) tracking market trends tripled their short bond positions from two weeks earlier at the end of July, and these bets have remained at a high level since then. According to UBS strategist Nicolas Le Roux, for every 1 basis point move in the 10-year US Treasury yield, the CTA's profit and loss exposure is as high as $300 million, marking the highest level since the bank began tracking this data in 1990.

This bond sell-off, driven by high oil prices, rate hike expectations, and surging government borrowing, has pushed the 30-year US Treasury yield to its highest level since 2007. As of Tuesday's close, the 30-year US Treasury yield remained around the high level of 5.25%.

1.29 Million Net Short Contracts: A “Self-Reinforcing” Momentum Bet

The starting point of this epic short bet was a wave of bond selling triggered by inflation concerns. In May 2026, the 10-year US Treasury yield soared above 4.6%, reaching a new one-year high, impacting a large number of fixed income portfolios and confirming the bearish logic: persistent inflation, a hawkish stance by the Fed extending far beyond previous market expectations.

Trend-following funds—i.e. CTAs (Commodity Trading Advisors)—are essentially momentum trading machines. They do not form independent subjective economic views but simply trade based on price signals. When bond prices keep falling, this trading strategy becomes self-reinforcing: more funds flow in the same direction, further depressing bond prices, reinforcing the trend signal, and attracting more short sellers to enter.

By the end of July, this negative feedback loop had created historically high short positions. Exchange data showed that trend-following hedge funds and leveraged investors had established 1.29 million net short contracts on US Treasury futures—an all-time high. The shorts were not concentrated on a single maturity, but spread across various segments of the US yield curve, further amplifying overall risk exposure. UBS data indicated that by the end of July, CTAs had doubled their underweight bond positions compared to two weeks earlier, with positions remaining largely stable since then. It is estimated that assets managed by CTAs exceed $400 billion.

Strategists at Bank of America also observed extremely bearish CTA positions, noting that this group remains “heavily net short,” especially concentrated in short-term Treasuries—making Wednesday’s inflation report especially crucial.

Asymmetric Risk: Crowded Shorts Face “Short Squeeze” Pressure

Overly one-sided positions pose significant reversal risks. Phoebe White, UBS’s Head of US Rates Strategy, bluntly stated: “There’s not much room to add to shorts, and the risk is clearly asymmetric.” She noted that if bonds rally, traders are much more likely to cover shorts than add to shorts if bonds continue falling.

This means that if the CPI data is mild enough to weaken September rate hike expectations, crowded short positions could trigger a massive wave of short covering, causing bond prices to soar and yields to fall sharply. Conversely, if the CPI data is hot, the space for adding shorts is limited—this very asymmetry is the biggest risk facing the market.

Bank of America strategists, including Meghan Swiber, wrote in a research report on Monday: “If the data do not support a September rate hike, it could challenge crowded bearish positions, especially given the sizable CTA shorts and low allocations among active funds.”

Following last Friday’s weaker-than-expected non-farm payrolls data, White and her colleagues already advised clients to buy two-year US Treasuries. Her reasons for being bullish include signs inflation may have peaked, and that today’s highly crowded shorts could become an extra tailwind if bonds rebound.

CPI Will Settle It: Evenly Split Rate Hike Probabilities and a Market Crossroads

The July CPI data, to be released at 8:30 pm Beijing Time tonight, will directly determine the fate of this historic level of short positions. The Dow Jones market consensus expects overall CPI to rise 0.1% month-on-month and 3.4% year-on-year; core CPI is expected to rise 0.2% month-on-month and 2.5% year-on-year. Both year-on-year indicators declined by 0.1 percentage points compared with June. Notably, month-on-month growth will turn positive from June’s -0.4%, reflecting a narrower drop in energy prices and a rebound in some inflation components.

Goldman Sachs’ economic team is more dovish, forecasting core CPI to rise 0.19% month-over-month in July (below the 0.2% consensus), and overall CPI up only 0.05%. Goldman also warns that a rebound in oil prices will make it difficult for the market to fully relax.

JPMorgan has set out five scenarios, with the most likely (40% probability) being core inflation at 0.2%–0.25%, which is expected to push the S&P 500 up by 0.25%–0.75%.

Deutsche Bank expects CPI to rise 0.15% month-on-month, with core CPI potentially up 0.26%. Bank of America analysts believe that if inflation data unexpectedly undershoots, the dollar could react more strongly as this would largely eliminate the chances of a Fed rate hike in September.

CME “Fed Watch” data shows that as of August 12th, markets are pricing a 52.0% chance that the Fed will keep rates unchanged in September, and a 48.0% chance of a 25bp hike. This probability was near 80% at the start of the month but has steadily fallen, now sitting at a critical 50-50 level.

Last Friday, after the weaker-than-expected non-farm payrolls report, White and her team already advised clients to buy two-year US Treasuries—in addition to signs that inflation may have peaked, the extremely crowded bond short positions themselves became a key factor supporting their bullish view.

The 30-year US Treasury yield hit its highest level since 2007 last month and has remained near those highs. As of Tuesday’s close, the 10-year yield stood at 4.6904%, and the 30-year yield at 5.2413%.

If the data is mild tonight, the crowded short positions will face “short squeeze” pressure, and the bond market could see a violent rebound; if the data is hot, short sellers have limited room to add, but expectations of a September Fed rate hike will be further solidified. In any scenario, this $400 billion trend-driven bond market battle will face its key “judgment moment” tonight.