Look to the fine print of Treasury futures for the next big jump in bond yields.

As U.S. 30-year securities head ever closer toward 6%, the move threatens a shakeup in futures, which are widely used by investors to hedge government bond positions, and by leveraged funds in strategies such as the popular “basis trade.”

It has to do with the mechanics. U.S. bond futures are exchange-traded agreements to buy or sell Treasuries at a set price and date. They’re governed by contract terms that dictate what type of underlying securities are allowed to be delivered by traders with short positions to those with long positions, and several typically qualify. Traders then identify the one that’s cheapest to deliver, or “CTD,” and the price of the futures contract tracks it.

When yields rise rapidly, as is happening now, the pricing dynamics of the deliverable basket of securities are altered, and the CTD starts to migrate toward a longer-maturity bond. This forces asset managers to adjust to this so-called duration shift, or “CTD switch,” by selling Treasury futures, which in turn “could exacerbate the rise in long-end yields” in the cash market, according to a recent note by strategists at BNP, including Guneet Dhingra, Sebastian Mauleon and Vincent Zhou.

To maintain a stable duration target in a portfolio as the CTD shifts toward longer-duration bonds, long futures positions would need to be sold while short positions would need to be bought back. Depending on how these dynamics interact and at what times, this can cause spillover effects in the underlying bonds.

Focus is on the longer maturities, notably the long-bond contract where the current CTD security is the 2.5% February 2045 bond. A Bloomberg scenario analysis shows that a 30-year yield rise to near 6% could result in a CTD shift to a 2050 maturity.

On Monday, 30-year yields climbed to 5.70%, a level not seen since 2002.

In a note on Monday, Barclays PLC strategists Andres Mok and Amrut Nashikka highlighted the duration implications around CTD extensions for asset managers, noting that “investors may need to reduce futures exposure or rebalance hedge ratios to bring portfolio duration back in line with their targets.” They added that “higher rates and volatility have increased uncertainty around CTD outcomes.” They estimate asset managers’ gross rebalancing needs at about $25 million per basis point in the long-bond contract, and $3 million per basis point in the ultra-long bond contract.

Recent positioning data suggests that investors are already starting to make these adjustments. Asset managers have been reducing net long positions in the long-bond and ultra-long bond futures in recent weeks, a time when 30-year yields moved sharply higher past 5.6%. For Goldman Sachs Group Inc. strategists including George Cole and William Marshall, the drop in long futures positions is likely a sign of “active management of the duration extension risk associated with potential Treasury futures CTD switches,” according to a recent note.

The latest data from the Commodity Futures Trading Commission showed aggressive selling of ultra-long bond contracts. In the week up to Sept. 29, when 30-year yields rose from 5.28% to as high as 5.62%, asset managers cut their net long in ultra-long futures positioning by almost 100,000 contracts — an amount equivalent to $15 million per basis point in risk, or $11 billion’s worth of the current 30-year cash bond. A more subtle positioning shift in the long-bond contracts over the same period signals that the CTD switch risk and associated forced selling is still live for that tenor.

“The ultra-long bond has already shifted to the higher duration CTD but the long-bond futures still has upside risk to duration extension,” said Monty Gandhi, a rates strategist at SMBC.

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