Record short positioning in bonds by trend-following funds increases market sensitivity to the upcoming CPI report, with both direction risks elevated.
Trend-chasing funds have amassed a record short position in U.S. Treasuries, placing a massive bet that yields will rise. CPI data is the next key risk event that could either validate this by showing persistent inflation, leading to a further sell-off, or cause a short-squeeze if inflation cools. The high conviction positioning amplifies the potential reaction in the 10-year yield.
Speculative net short positions have reached the highest level in years, driven by trend-following funds betting on rising yields.
A hot CPI reading above forecasts would likely cause yields to spike as markets price in more Fed tightening, rewarding the shorts. A soft CPI could squeeze short positions, forcing yields sharply lower.
A downside surprise in inflation could cause a violent short-squeeze, leading to rapid losses as bond prices rally and yields fall, potentially reversing the recent trend.
Hedge funds and CTAs have built their largest short position in U.S. Treasuries since 2020, betting on higher yields. The upcoming CPI release is a make-or-break event: a hot print could trigger a bond selloff and profit the shorts, while a soft number may force a sharp short-squeeze. This positioning has amplified the potential for outsized moves in the bond market around the data.
These funds follow momentum and have been taking cues from the persistent trend of rising interest rates and sticky inflation expectations. They likely anticipate that the Federal Reserve will keep rates elevated for longer, pushing bond prices lower.
The CPI report is the next major indicator of inflation, and it has the power to either confirm the bearish thesis or cause a dramatic reversal. A hot CPI would reinforce the short trade, while a cold CPI could trigger a sharp short covering rally.
Speculative net short positions in Treasury futures have reached their highest levels since at least 2020, indicating extreme bearish sentiment and crowded positioning.