Last week saw the largest drop in aggregate Treasury short positions since Brexit. Ironically, while bond bears felt the squeeze, traders piled into Eurodollar shorts (increased rate-hike bets) sending the short-end's positioning to record highs.

Across the entire Treasury bond futures complex, shorts covered over 200,000 10-year-equivalent contracts (around $20 billion notional), but as is clear below, the net short - while the smallest since December 2nd - remains extreme relative to norms over the last 6 years.

At the same time, Eurodollar traders added to their rate-hike bets - extending the net short to a record 3.009 million contracts... (over $3 trillion notional)

The lofty fiscal expectations surrounding President Donald Trump have begun to subside.

The short-dated skew between payers and receivers on 10-year yields is flat, with the risks now more symmetric for rates, allowing investors to position for outcomes following the U.S. fiscal debate. Steeper skews would indicate payers richening relative to receivers, signaling expectations for higher rates.

Additionally, as Bloomberg's Tanvir Sandhu notes, another factor that bears need to contend with is overseas demand for Treasuries. The cost of currency-hedging for dollar assets has cheapened for Japanese investors, with the three-month basis now at the two-year average. Japanese life insurers typically buy domestic bonds in March and foreign bonds in the first half of the fiscal year that starts in April. This may help keep U.S. 10-year yields below 3 percent.