As the financial world turns its gaze toward the upcoming Federal Open Market Committee (FOMC) meeting, recent market flows have exhibited a bearish inclination in U.S. Treasuries. The trading patterns have shown an equilibrium between the initiation of new short positions and the unwinding of long ones, each accounting for around $12 million in activity. This suggests that the market is bracing for what it perceives as a mildly hawkish stance from the Federal Reserve.

The current positioning leans towards a slight tactical or structural short, yet the realized profits from these positions are minimal, typically less than 10 basis points, and are predominantly clustered in the middle of the yield curve.

In tandem with these bearish trends, systematic accounts have taken a decisive stance, flipping entirely to short positions. It’s worth noting that significant rate movements exceeding 25 basis points would be necessary to prompt a reduction in these short positions at the front end of the curve. Conversely, smaller shifts of less than 10 basis points at the long end could effectuate the same.

The volatility markets mirror this sentiment, as evidenced by an enrichment of put skew across various instruments. This is particularly pronounced in Treasury notes, where the risk appears balanced in Federal Funds but is nearing bearish peaks in 10-year Treasury notes.

A similar downtrend is observable in the Secured Overnight Financing Rate (SOFR), where the past week has seen a considerable increase in short positions, particularly in the near-term (white) and medium-term (red) segments. Consequently, the market is moderately short, with tactical setups yielding approximately 10 basis points of profit.

As the FOMC meeting approaches, there are several critical levels to monitor:

UST 10-Year Notes: The short side is the primary focus, with total commitment to short positions below a price of 110-16. There is a notable concentration of TY put options at the 109-16 level, while Commodity Trading Advisors (CTAs) are poised to trim shorts at the 111-00 mark.

Yield Curves: There’s a discernible market inclination towards 2/5 year flatteners, which become profitable below a spread of -35 basis points. Meanwhile, in the 5/30 year spread, the market has favoured steepeners that are profitable around a spread of 12 basis points.

SOFR: More significant tactical short positions are evident in SFRH5 futures, which are profitable below 95.77, and in the Fed Funds futures for May 2024, where substantial short positions are profitable below 94.75.

Market participants are aligning their strategies and bracing for potential shifts as the FOMC reveals its outlook, influencing not only positions in the UST and SOFR but also the broader financial landscape.