The Federal Reserve will announce its interest rate decision this Wednesday. Even before the meeting has begun, the bond market has already shown its judgment with real money – the vast majority of traders believe this will be the first time the Fed has pressed the interest rate button since 2023. Yields Hit Nearly 20-Year Highs: How Far Have Bond Prices Fallen? This judgment is first reflected in prices. On Tuesday, the yield on the 10-year US Treasury note rose to its highest level since 2007, meaning that the price of benchmark bonds had fallen to its worst point in nearly two decades; following closely behind, the two-year yield also hit a new high since 2024. Here, it's necessary to explain a basic relationship: bond yields and bond prices move inversely; the higher the yield, the more intense the sell-off and the greater the paper losses for holders. The two-year yield is particularly noteworthy because it most closely reflects the Federal Reserve's policy expectations—its movement usually means the market is already pricing in the possibility of a central bank rate cut. By Wednesday's Asian session, the 10-year yield had fallen slightly by 1 basis point (one basis point equals 0.01 percentage points) to 4.99%, but remained firmly in its near 20-year high range. Simultaneous Short Selling in Three Markets: What Are Traders Doing? Behind the price movements lies a sharp change in positions. Short selling is betting on further price declines. This time, short positions weren't concentrated in a single market, but rather accumulated simultaneously across three markets: cash Treasury bonds, Treasury futures, and interest rate derivatives. First, let's look at the cash market: JPMorgan Chase's survey of clients shows that in the week ending September 14th, clients increased their short positions at the fastest pace since early 2025, with the short position percentage jumping 10 percentage points in a week. Eight of these percentage points came from previously neutral positions—in other words, those who were previously on the sidelines are now flocking to the bearish side. Next, let's look at the futures market: Chicago Mercantile Exchange (CME) positioning data shows that investors increased their short positions in Treasury futures both before and after the release of last week's US CPI data. The CPI is a core indicator of price increases, and this data was stronger than expected, further fueling the argument that the Federal Reserve must raise interest rates. The derivatives market also saw significant activity: a large, one-sided bearish trade appeared in federal funds futures, amounting to approximately $1.9 million per basis point (DV01). In simpler terms, for every 1 basis point change in interest rates, this position would either gain or lose $1.9 million. Pricing in the interest rate swap market is even more straightforward—traders have already priced in approximately 50 basis points of interest rate hikes for the remainder of the year, including the September meeting. Citigroup strategist David Bieber succinctly summarized the current situation: "Short positions have accumulated rapidly over the past week, reaching a tactical extreme." Why such a one-sided situation? Three reasons combined Supporting this certainty are mainly three factors combined. First, the war-driven rise in oil prices directly impacts commodity prices, exacerbating inflationary pressures. Second, signs of a rebound in inflation; last week's stronger-than-expected CPI indicates that "price cooling" is not progressing as smoothly as anticipated. Third, concerns about the US government's fiscal deficit; expectations of increased bond issuance will further suppress bond prices. Three forces combined have pushed Wall Street's pricing of a rate hike at this meeting to over 90%—a level of confidence rarely seen in decades. Jason Thomas, global head of research and investment strategy at The Carlyle Group, put it more directly: the Fed is facing "enormous pressure" to raise rates by 25 basis points. His reasoning is relatable: "People have been hurt by persistently rising prices, and living standards have declined; the Fed must take its responsibility to stabilize prices seriously." Some traders are also betting on a "no rate hike": another scenario is being hedged. Of course, there's never only one voice in the market, and traders are also preparing for another scenario: what happens if the Fed doesn't raise rates this time, or if it does raise rates but doesn't provide clear follow-up guidance? The logic is roughly this: if there's no rate hike, the market will think the Fed is "lagging behind the inflation curve," and long-term Treasury holders will demand higher yields to compensate for inflation risk, thus long-term yields will continue to rise; at the same time, if the policy rate remains unchanged, it will push short-term yields down. Between the rise and fall, the yield curve has become steeper, and holders of long-term bonds continue to suffer losses. Indeed, some traders are betting on a "wait-and-see" approach this week: Tuesday saw a rush to buy low-priced call options for October and November contracts in the short-term interest rate options market. These options are linked to the SOFR (Secure Overnight Financing Rate), an interest rate benchmark also heavily influenced by Fed policy. Those buying these options are betting that interest rates won't rise significantly in the coming months. However, according to Bloomberg's analysis, this is still a minority view; the broader SOFR options market is busy setting up downside protection for "further rate hikes in the future." How much short selling has accumulated: A look at the positioning data Looking at the positioning data from the past week, the extent of short selling is quite evident. A JPMorgan survey shows that the proportion of short positions rose by 10 percentage points in a week, while neutral positions fell by 8 percentage points. Net long positions across all clients are at their lowest level in about four months, indicating that clients have shifted from a "wait-and-see" to a "clearly bearish" stance. In the options market, a significant amount of new risk emerged near the 95.4375 strike price for SOFR options expiring in December 2026, March 2027, and June 2027. This was primarily driven by a large-scale straddle option sell-off – a straddle option is a simultaneous sell-off of both a call and a put option with the same strike price, essentially betting that "future interest rates will not fluctuate significantly." This short volatility trade saw approximately 80,000 contracts traded over Friday and Monday, generating over $100 million in premium income from the straddle option sell-off (approximately 30,000 contracts on Friday and 50,000 contracts on Monday). Meanwhile, the number of open contracts at the 96.50 strike price remained the highest in the market, with heavy open interest in December 2026 call options. Following Friday's CPI release, the market also established a new batch of downside protection positions, targeting potential further interest rate hikes in the coming months. Looking at the "skewness" of options—which can be understood as which side the market is more willing to pay premiums for—traders are currently paying significantly more to hedge against further declines in long-term Treasury bonds than to hedge against increases, indicating that they are more afraid of bond price drops. Meanwhile, the skewness of options on 2- to 10-year Treasury bonds is close to neutral, with no obvious one-sided panic at the short to medium end. Bank of America strategists Megan Swieber and Eleanor Shaw summarized this as follows: "Positioning remains significantly bearish ahead of the Fed meeting, with short positions accumulating across the entire yield curve. Asset management companies are mostly reducing long positions or increasing short positions, and there are currently almost no signs of buying duration on dips." The next key points: Three things to watch Next, everyone's attention will be focused on the meeting on Wednesday evening and the subsequent statements. There are three things to watch: First, the interest rate decision itself—whether or not to raise rates, and by how much; the mainstream market expectation is 25 basis points. Second, more important than the rate hike itself is the post-meeting statement and the Fed Chairman's wording—whether it hints that "this is just the beginning, and more will follow," which directly determines whether long-term yields continue to rise or fall. Third, the short positions described by Citi as "extreme"—if the Fed's statement is more dovish than expected, these concentrated short positions may be forced to be liquidated, which could push bond prices to rebound rapidly, causing the market to move in the opposite direction of most people's expectations. In short, the current market story can be summarized as: most people are betting that the Fed will raise rates, and that there might be more. In such a nearly one-sided market, what is truly alarming is not that most people have bet on the right direction, but rather—when everyone is on the same side, a reversal often comes more violently than imagined.