Bond market turning point is near! The wave of position closing is coming to an end; U.S. Treasury bonds face a key test for the next move

According to Zhitong Finance, during the sell-off triggered by the Middle East war, the process of bond traders rapidly closing out U.S. Treasury futures positions is gradually coming to an end. This paves the way for new bets and will determine whether this market plunge will reverse or deepen further.

Just before the outbreak of U.S.-Israeli military action against Iran on February 28, positioning in the U.S. Treasury futures market was clearly skewed towards betting on lower interest rates. This was partly a reflection of investors’ concerns about the economic growth outlook. However, as the war caused oil prices to soar, these concerns were abruptly replaced by inflation fears, forcing unprepared traders to exit their positions and further accelerating the market decline.

According to research from Morgan Stanley, such position-driven market dislocations usually dissipate over 10 to 15 days. This Tuesday marked the 17th trading day since the outbreak of war, with U.S. Treasury yields near multi-month highs. However, yields pulled back later in the day following reports that the U.S. was seeking a one-month ceasefire with Iran.

Morgan Stanley rates strategist Shaun Zhou wrote in a report on Monday: “This brings the market close to an inflection point. Over the next few weeks, the distinction between position unwinding and structural shifts should become clearer.”

Although the largest round of position unwinding occurred on March 2, subsequent new positions overall sent a bearish signal, targeting further increases in U.S. Treasury yields.

Citi strategist David Bieber said in a report on Monday: “We have seen a large number of new short risk exposures added during the price decline, and currently both tactical and structural positions exhibit a ‘moderate, unidirectional short’ profile.”

In the cash market, a JPMorgan U.S. Treasury client survey published Tuesday showed that neutral positions rose significantly, indicating a high degree of uncertainty regarding the future path of U.S. Treasury yields.

Regarding the most heavily unwound segment, since March 2, the 10-year U.S. Treasury futures have seen the largest amount of position closures. In 12 of the last 16 trading days, open interest (i.e., new risk exposure held by traders) fell by a cumulative 550,000 contracts, equivalent to about $36 million of risk per basis point movement. By cash market standards, this is about $4.5 billion in current 10-year Treasury scale.

Below is an overview of the latest position indicators in the interest rate market:

According to the JPMorgan client survey, for the week ending March 23, investors reduced short positions by 6 percentage points and shifted to neutral positions (up 6 percentage points). Absolute long positions remained unchanged during the week, bringing net long positions to the highest level since December.

In the past week, open interest in options with a strike price of 96.625 surged, with capital flows concentrated on downside protection toward year-end. For example, there were buyers for 1x2 put spreads with strikes of 97.00/96.625 expiring in December 2026. Over the past week, demand was also seen for options with a 96.25 strike, with open interest rising for both calls and puts expiring in June 2026—capital flows included purchases of SFRM6 96.50/96.375/96.25/96.125 put butterfly spreads. The 96.50 strike options were also very active, with recent flows including SFRZ6 96.50/96.75/97.00/97.25 call butterfly spreads, SFRM6 96.50/96.375/96.25/96.125 put butterfly spreads, and SFRM6 96.50/96.375/96.3125/96.1875 put butterfly spreads.

Overall, in options expiring in June, September, and December 2026, the most concentrated strike price is 96.50, with substantial June 2026 call and put risk still focused at this level. The June SOFR options will expire on June 12, which is one week ahead of the June 17 policy statement. In addition, there is significant open interest around the 96.4375 strike with related capital flows including purchases of SFRM6 96.4375/96.50 call spreads while selling 2QM6 97.375 call options—this is a type of bullish butterfly structure, with trading volumes about 100,000 to 50,000 contracts.

Furthermore, premiums for options used to hedge U.S. Treasury futures risk have continued to move away from multi-month extreme levels, but remain clearly skewed towards puts, especially in the longer-dated term structure.