U.S. Treasury traders are betting that a Fed rate hike is imminent, with SOFR options and futures positions quickly turning hawkish.

```

Robust US employment data has fueled market expectations of a Fed rate hike, with Treasury traders rapidly building concentrated bearish positions.

The US May non-farm payrolls report released last Friday beat all forecasts, marking the strongest labor market recovery signal so far. This directly spurred heavy new bets on rate hikes in the SOFR options market, with some trades even pointing to hikes beginning as early as September. The SOFR futures market has now fully priced in at least one 25 basis point rate hike this year.

The US May CPI data, to be released on Wednesday, is the next critical event. If inflation data exceeds expectations, it will further solidify rate hike expectations and trigger more bearish positions; if it falls short, it could lead to a short squeeze, giving the bond market a respite.

SOFR Options Market: Rate Hike Bets Heating Up Across the Board

Since last Friday’s jobs report, the SOFR options market, highly sensitive to Fed policy trends, has continued to absorb new bearish positions, with trading volumes significantly above normal levels.

Several notable trades directly target at least one, or even two, rate hikes before the Fed’s September meeting. Even amid falling equities and weaker oil prices that helped stabilize cash bonds, bearish sentiment in the options market remains unabated.

TD Securities head of US rates strategy Gennadiy Goldberg said:

"Strong non-farm data combined with persistent inflation has pushed the market to further raise the probability of Fed tightening. This has kept yields elevated, even though risk-off sentiment in equities has to some extent supported yields."

SOFR Futures: Hedge Fund Short Positions Hit Record Highs

The bearish sentiment isn’t limited to the options market; futures are sending the same clear signal. According to the latest CFTC report, hedge funds increased their net short SOFR futures positions to record highs even before the non-farm data was released.

Citigroup strategist David Bieber wrote in a Tuesday report, "Short momentum still dominates."

However, it is worth noting that these leveraged short positions aren’t always outright directional bets; they may involve basis trades versus cash or swaps, and convexity hedging strategies by hedge funds.

Should confidence in a rate hike waver, these highly concentrated SOFR shorts risk a rapid unwind, potentially causing a short-term bond market rally.

Options Positioning Details: Recent Bearish Structures Dominate, 96.50 Strike Most Crowded

In terms of detailed position distribution, most new SOFR risk in the past week has focused on Dec26 puts, especially the SFRZ6 96.125/96.00/95.375 put fly structure, which has seen notable buying.

At the same time, several Jun26 strikes have seen significant declines in open interest for both calls and puts, indicating some positions have already been closed out.

The 96.50 strike currently remains the most crowded point in the options market, with notable call open interest in both Jun26 and Dec26. Over the past week, there’s also been considerable new activity in SFRZ6 96.50/97.00/97.50 call trees, reflecting some traders hedging for a potential rate cut path.

For Treasury options skew, the implied premium for long-end Treasury futures options remains tilted towards the bearish side, showing traders are paying more to hedge against further rises in long-term yields; the skew of 2-year to 10-year Treasury futures options continues to revert towards neutral levels.

Cash Market: JPMorgan Survey Shows Some Short Covering

In contrast to the short-dominated options and futures, sentiment in the cash market shows marginal stabilization.

According to JPMorgan’s latest US Treasury client survey, in the week to June 8, outright short positions fell by two percentage points, moving into neutral, while long positions were unchanged. The full survey shows that the share of shorts is now at its lowest level since May 4.

This divergence signals that while rate hike bets continue to intensify in derivatives markets, some spot market participants are starting to cautiously reassess the risks of being excessively bearish. Wednesday’s CPI data will be a key test for the justification of current pricing.

Risk Warning and DisclaimerThe market carries risk, and investment requires caution. This article does not constitute individual investment advice, nor does it take into account special investment objectives, financial situations, or needs of individual users. Users should consider whether any opinions, views or conclusions in this article suit their circumstances. All investments are made at your own risk. ```