Short positions on U.S. Treasuries continue to rise, with October CPI data in the spotlight

According to the Zhitong Finance APP, traders are heavily betting on further selling in the U.S. Treasury market, as they expect the policies promised by Trump to lead to a resurgence of inflation and keep the federal funds rate elevated. Data released on Tuesday showed that the open interest in two-year U.S. Treasury futures rose for the fourth consecutive trading day, indicating that traders are building bearish positions ahead of the October inflation data to be released on Wednesday.

As short bets expand, U.S. Treasuries are facing selling pressure. On Tuesday, U.S. Treasury yields rose across the board by more than 10 basis points, with two-year and five-year Treasury yields climbing to their highest levels since July. Citigroup strategist David Bieber stated, "We see investors chasing price trends. This is a market that is correctly positioning itself for the election outcome. However, there is generally insufficient investment in the short positions in the U.S. Treasury market."

As bond investors and Federal Reserve watchers assess the trajectory of U.S. interest rates, inflation has once again become their focus. The market expects the year-on-year increase in the U.S. CPI for October to be 2.6%, up from 2.4% in September; the core CPI is expected to grow by 3.3% year-on-year, unchanged from September, continuing its previous sticky performance.

The uncertainty regarding the future direction of U.S. policy and the recent mixed economic data have led to significant divergence in the market's expectations for the Federal Reserve's December decision. Traders currently anticipate that the likelihood of the Federal Reserve cutting rates by 25 basis points again in December is slightly above 50%.

Minneapolis Fed President Neel Kashkari stated on Tuesday that he will be watching the upcoming inflation data to determine whether another rate cut is appropriate at the December policy meeting. He noted that given housing inflation is above average, it may take one to two years for inflation to reach the target. However, he added that the cooling of housing prices is "encouraging."

Scott Johnson, Deputy Head of Global Models at Bloomberg Economics, stated that the U.S. October CPI data to be released on Wednesday could further weaken expectations for a rate cut by the Federal Reserve in December, with higher-than-expected inflation data potentially pushing up the two-year Treasury yield forecast through 2025