Economic Growth Concerns Heat Up as Traders Trim US Treasury Short Positions Ahead of Fed Decision

Bond traders are trimming some of their aggressive bets that had largely driven markets to dismiss expectations of a Fed rate cut this year.

With the $31 trillion bond market caught between growth risks and inflation risks triggered by the Middle East conflict, futures traders are unwinding recent large short positions in U.S. Treasuries ahead of the Federal Reserve policy meeting on Wednesday.

Although no rate adjustments are expected this week, policymakers will release projections for the future interest rate path over the coming months. Traders will also closely watch Fed Chair Jerome Powell’s press conference for clues on how the central bank will balance rising energy prices against signs of a slowdown in the labor market.

Earlier, concerns about inflation intensified after oil prices surged past $100 a barrel, prompting bond traders to delay expectations of a Fed rate cut until next year, with short-term Treasury sell-offs intensifying. This week, markets have again priced in the possibility of at least a 25 basis point rate cut by the end of 2026.

“The interest rate market has undergone a rapid and intense re-pricing,” said Ruben Hovhannisyan, a senior portfolio manager at TCW. “While a prolonged conflict could alter inflation outlooks, our baseline scenario is that the conflict may be resolved within weeks rather than months. CPI could rise, but the pass-through to core inflation is generally limited,” he added, noting that a weak labor market could dampen the impact.