The U.S. election is approaching, and positions are reversing: traders abandon long positions on interest rates and short positions on the "fear index" VIX

The U.S. election countdown has begun, and investors in the financial markets are experiencing a significant shift in their bets on interest rates and the "fear index" VIX, which measures U.S. stock volatility.

On Monday, November 4th, Bloomberg macro strategist Simon White pointed out that ahead of the election, speculators reversed their net long positions in short-term U.S. interest rates and net short positions in VIX, meaning that short-term rates have turned into net short positions while VIX has become a net long position. At the same time, the market still holds long positions in stocks and bonds and has begun to heavily go long on silver.

Specifically regarding short-term interest rate bets, White stated that according to the Commodity Futures Trading Commission (CFTC) data on trader commitments (COT) released, as of last Tuesday when the CFTC collected the latest data, the net long positions in secured overnight financing rate (SOFR) futures that speculators maintained throughout this summer have evaporated.

Why this change? Because rapidly rising liquidity and stubborn inflation are driving market expectations that economic growth will be stronger than anticipated, leading to a repricing of short-term rates. Currently, the market expects that by the end of 2025, the Federal Reserve will have cut interest rates by a total of about 130 basis points.

As shown in the above chart, market traders believe that holding short positions in VIX during this election period is not reassuring. Currently, the size of long positions in VIX slightly exceeds that of short positions, marking the first time since 2019 that it has turned into a net long position. Perhaps because gold now appears overbought, traders are looking for replenishment trades, and net long positions in silver have surged to their highest level in eight years.

Last week, Wall Street Journal mentioned that as U.S. stocks approach historical highs, VIX has turned into a net long position for the first time since 2018, which is a very rare phenomenon, as the stock market often experiences downward or corrective phases when VIX positions are net long. White believes this indicates that the market is viewing high volatility as a characteristic of the current bull market rather than a flaw.

On Monday, White pointed out that the market has readjusted its view on VIX, with long positions not accompanied by expectations of a certain decline in the stock market, at least from the perspective of stock positions. Currently, stock positions remain net long, covering S&P mini-index, Nasdaq index, Dow Jones mini-index, and S&P mid-cap futures. The ratio of this net long position to open contracts has decreased from a recent high of 29% to 7%.

In terms of government bonds, positions overall remain long, although they have decreased compared to a few weeks ago. However, in the bond market, risks may also have been mitigated. One way to observe this is to look at how the open contracts of bond futures change with daily price fluctuations of the contracts.

The chart below shows that, based on the methodology of JPMorgan, combining the daily changes in open contracts of 10-year U.S. Treasury futures and daily price fluctuation indicators, the measurement results of changes in U.S. Treasury positions indicate that since September, net long positions in bond futures have been declining

In addition, in recent weeks, the market's bets on the dollar have also reversed from net short positions to net long positions, as investors believe that Trump's election will be beneficial for the dollar. However, White believes that while it may indeed be favorable for the dollar in the short term, neither Trump nor Harris seems willing to constrain the fiscal deficit, which is structurally negative for the dollar