Short and strong Sliding shorter

US Rates Watch Short and strong

Sliding shorter 26 July 2026 Positioning turned incrementally more bearish this week. While CTAs were already running shorts, they added to positions in longer-dated tenors (see: Systematic Flows Rates Research Monitor). Active benchmark funds moved from roughly neutral to underweight duration, United States marking the largest duration reduction since Liberation Day. Open interest data suggest Meghan Swiber, CFA out-of-the-money longs were cut further, leaving profitable shorts as the dominant Rates Strategist position across the curve. BofAS Auction data continue to highlight a bifurcated demand backdrop, with strong domestic Eleanor Xiao Rates Strategist fund buying offsetting persistently weak foreign sponsorship. Meanwhile, fixed income BofAS inflows cooled, although short-duration Treasury funds continued to attract demand as

investors favored attractive front-end yields amid modestly higher rate volatility. US Rates Research BofAS Markets are heading into the July FOMC with unusually elevated uncertainty. We remain See Team Page for List of Analysts short 2s and favor curve flatteners. A hike would reinforce our core view of higher front- end rates, while a dovish outcome could trigger an outsized rally given crowded shorts. CFTC: Commodities Futures Trading Exhibit 1: Curve-o-meter Commission Rates to trade like positioning is roughly neutral duration with longs out of the money and modestly in a flattener CTA: Commodity Trading Adviser

MBS: Mortgage Backed Securities

Source: BofA Global Research, Note: dial shows duration = average 5y percentiles of CTA positioning + net OTM position implied from TIC: Treasury International Capital futures positioning proxy + CFTC non-comm ex LF + fund regression duration beta. Curve = avg 5y percentiles of CTA betas + futures positioning proxy + fund regression curve beta WN = Treasury 30Y contract BofA GLOBAL RESEARCH

Shorts dominate and are in the money See Appendix on page 22 for a detailed list of abbreviations and acronyms. Our futures positioning proxy reflects that shorts are the dominant positions across the curve and are widely in the money (Exhibit 9 and Exhibit 10). Over the last week, longs were closed and remain the net OTM position. If momentum remains bearish, there is still room for longs to be covered, albeit less pronounced vs prior weeks.

Report continued on subsequent pages…

Trading ideas and investment strategies discussed herein may give rise to significant risk and are not suitable for all investors. Investors should have experience in relevant markets and the financial resources to absorb any losses arising from applying these ideas or strategies. BofA Securities does and seeks to do business with issuers covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 22 to 24. Analyst Certification on page 22.

Active funds rotate underweight duration On the week, active benchmark funds rotated notably underweight duration (Exhibit 41). They now sit at the most underweight levels since May marking the largest WoW duration reduction since liberation day (Exhibit 42, early April ’25) and occurred alongside a modest preference for flatter curves. Funds currently hold a notable overweight in IG spreads (Exhibit 46). As discussed in Agg Alpha (see note), we recommend these funds reduce IG overweight with heavy supply a technical headwind to performance.

Asset managers move flatter Asset managers leaned into curve flatteners last week. In the front end, they added shorts and closed longs, while in the long end they primarily covered shorts (Exhibit 7). Their maturity allocation has also become more balanced across the curve, reversing the pronounced front-end bias that emerged following Liberation Day (Exhibit 6).

Auction data reflects foreign vs domestic split July auction data for mid-month settlement continues to reflect the bifurcation between weak foreign and very strong domestic investment fund…