As the 18 September note argued, leveraged funds had extended their 2-year Treasury net short by 33,281 contracts in the week to 8 September, a position the desk called out at the 97.4th percentile of its own three-year range, with the falsifier set at the yield trading at or below 4.60% following the 22 September auction. The fresh Commitments of Traders report, dated 15 September, shows the flow did not reverse. It extended: another 16,524 contracts added to the net short, now standing at 1,321,644 contracts. The falsifier level has not been touched; the 2-year yield sits at 4.76%, per the desk's own series, at the 100th percentile of its trailing year and a 2.84 z-score above its recent norm. On the stated test, the 18 September thesis holds, for now, and the auction itself lands on 22 September, so the cleanest read of that specific level still lies ahead.#
What makes the growing short harder to dismiss as noise is the corroboration from further out the curve. The 5-year and 10-year notes both show the opposite flow: short-covering, with the 5-year net short shrinking by 73,735 contracts and the 10-year by 34,821 contracts in the same week, per the CFTC data. The 2-year book, by contrast, sits at a 92.3 reading on the desk's 52-week Williams COT index, meaning this net-short position is near its most stretched of the past year; the 5-year and 10-year both sit even higher, near or at 100, but their spec flow is now covering, not adding. The front end of the curve is the one place leveraged funds keep leaning harder into a losing trade.#
A short that keeps growing at the point on the curve most exposed to the front-end policy path is a bet the Fed does not deliver the tightening the futures market is now pricing.#
That policy path gives the position its logic and its risk. Fed funds futures price 70 basis points of additional tightening over the next 12 months, not cuts, with the market's implied front rate at 4.015% rising to an implied 4.715% a year out. Federal Reserve Bank of St. Louis President Musalem said on 21 September that interest rates likely need to rise further to tame inflation that is both demand and supply-driven, and that inflation stripped of supply factors is still 'too high' at up to 3%, according to the wire carrying his remarks. The Chicago Fed president separately said fighting inflation is likely to be 'painful,' per PBS. None of that commentary supports a 2-year short unwinding on its own; if anything it corroborates the priced path the short is fighting. The tension is not between the Fed's words and the futures market, which broadly agree. It is between that shared hawkish signal and a leveraged short at the front end that keeps growing anyway, betting the market's own repricing goes further still and the 2-year yield has room to climb from 4.76% rather than snap back.#
The auction calendar this week is the near-term stress test, not the resolution. The 2-year auction lands on 22 September itself, with 5-year and 7-year auctions following on 23 and 24 September. A soft 2-year auction, one that prices at a higher yield than the market expected or draws weak demand, would validate the growing short by pushing yields higher still. A strong auction that pulls the yield back toward 4.60% would instead confirm the 18 September falsifier and leave the extended short exposed at its most stretched point in a year, with the 5-year and 10-year cohorts already covering having no equivalent to protect. The desk keeps the same test in place: the 2-year yield trading at or below 4.60% in the sessions following this week's auction, which would show a leveraged position that outgrew the policy path it was betting against.#
