(Bloomberg) -- Rate traders are hanging back from making big bets with the Federal Reserve’s policy path for this year very much up for debate.

Recent activity in the futures market suggests that investors moved to cover their bearish positions on shorter dated notes as the yield on US two-year continued its retreat from the 5% level. The shift comes after traders dovishly repriced the amount of rate cut premium for this year following soft US jobs data.  

With positioning in the Treasury market seeming to have shifted into neutral, the playbook has been left wide open for putting money to work on where the US central bank’s rate will land in 2024. Jerome Powell’s recent push back on the prospects of more rate hikes could further sour bearish bets.

While corners of the market are in wait-and-see mode, a mix of unwinding short positions and fresh wagers saw futures block activity surge over the past week. Most of the activity occurred in short to medium-dated bonds — those areas most sensitive to central bank policy rates. 

Tuesday saw yields on shorter maturity securities fall at a slower pace than those at the long end, a move that was helped by a huge block sale in futures linked to the Secured Overnight Financing rate, it follows similarly heavy activity seen in the aftermath of last week’s jobs data. 

Meanwhile, bank strategists are stepping in to re-establish their positions. Barclays recommended shorting fed funds futures and fading the amount of cuts priced into swaps, while Citigroup has stood by their call for multiple rate cuts this year.

The theme of shorts being unwound has also found its way into the cash market. JPMorgan Chase & Co.’s latest client survey showed shorts dropping 6 percentage points on the week, leaving the net long position the largest in three weeks. 

Here’s a rundown of the latest positioning indicators across the rates market: 

Shorts Cut

JPMorgan’s latest survey of Treasury clients showed short positions dropped by 6 percentage points on the week, boosting the net long position to the most since April 15. 

Block Trades Popular

Futures traders have been turning to block trades over the past week, as activity has soared across both two- and five-year note contracts. Standout flows over the past week have included steepener interest, with a notable block 2s10s trade seen equivalent to $1.4 million per basis point in risk. Additional flows last week included a $945k/DV01 10-year futures block buyer which appeared to be unwound over Monday’s session. 

Asset Managers Go Long 

Hedge fund short positions in Treasury futures were extended in the week up to April 30, Commodity Futures Trading Commission data suggest, the day before the May 1 Federal Reserve policy decision. 

The bearish positioning was extended by around 210,000 10-year note futures equivalents. It was the third week in a row that futures duration short had been extended. 

On the flip side, asset managers extended net duration long by around 126,000 10-year note futures equivalents. Over the past three weeks of data, asset managers have extended net duration long by over 1 million 10-year note futures equivalents. 

SOFR Options Most Active

In options linked to the Secured Overnight Financing Rate, large amount of risk was added in the 95.125 strikes following recent flows including heavy buying of the SOFR Sep24 95.00/95.125/95.25 call fly. 

Other open interest gains have included in the 94.8125 strike following recent flows including buyer of the Sep24 94.8125/94.9375/95.0625 call fly. Largest amount of liquidation was seen in the 95.00 strike with a notable drop in the Sep24 puts. 

SOFR Options Heat-Map

The most crowded SOFR options strike out to the Dec24 tenor is now the 95.50 strike, where a large amount of open interest can be seen in the Jun24 calls. The second most crowded is the 95.00 strike where a large amount of risk can also be seen in the Jun24 calls. 

Positioning is also growing in the 96.00 strike which is most heavily populated around the Dec24 calls with the SOFR Dec24 96.00/97.00 call spreads remaining a popular trade. 

Hedging a Selloff Cheapens

The premium on options to hedge a selloff in longer-term Treasury futures continued to erode, reflected by the spread between prices on puts and calls moving closer to neutral over the past week. 

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