Leveraged funds rebuild 2-year Treasury short to 98th percentile

The Commitments of Traders report for 6 October shows leveraged funds net short 1,266,767 contracts in the 2-year note, up from the prior week by 96,512 contracts. That is not a marginal move. The long position fell by 35,947 contracts while the short side added 60,565, meaning funds were trimming longs and adding fresh shorts at once. The Williams COT index for this net position sits at 91.9 on a 52-week basis, and the three-year percentile reads 98.1. The book is once again among the most stretched readings this desk has seen in that window.#

That re-stretching lines up with a rates backdrop that gives the short its logic. The 2-year Treasury yield sits at 4.79%, a level the desk's own percentile work puts at the 96.4th mark of its trailing year, with a z-score of 2.21. The 10-year sits even further out, at 5.21%, the 96.0th percentile and a z-score of 2.52. Fed funds futures price the policy rate 67 basis points higher twelve months out than the implied front rate. That firmer, no-cuts path lines up with wire reports that traders added to bets on three more Fed rate hikes by the end of 2027, and that core inflation's rise pushed up the odds of further increases.#

A short this stretched, re-added into a yield already near the top of its own year, is a position betting the firmer path keeps extending rather than stalling.#

The tension sits in the curve itself. The 2s10s spread is 0.37, a reading this desk's own data places at just the 14.7th percentile of the past year, with a negative z-score of 1.18. That is unusually flat for this stretch, even as both ends of the curve sit near yearly highs in yield. A leveraged short concentrated at the short end bets that the front of the curve cheapens further and faster than the long end. A flattening reading argues against exactly that, if the move instead comes from the long end selling off. The 10-year Treasury yield's own dip on 14 October, noted on the wires as traders awaited Thursday's data, is a reminder that this book is not moving in a straight line.#

What breaks this view is the same level this desk has watched since early October. The covering episode from 29 September to 6 October, the 186,853-contract reduction flagged on 8 October, proved temporary: the short has now grown back past where it stood two reports ago. The falsifier for the current build is a close in the 2-year Treasury yield at or below 4.60%, the same level that held through the prior covering and has not been touched since. A close through that level, even as the short grows larger, would mean the stretched position is wrong-footed by the cash market rather than vindicated by it. The desk is watching the next Commitments of Traders print, due in the coming week, to see whether the rebuild extends or marks the first sign of another reversal.#