A bearish tone is forming in the interest rate options market, indicating that bond traders are preparing for U.S. Treasury yields to surge again in the coming weeks.
The demand for bearish hedging using put structures on Treasury bond options has remained steady in the January contract of the 10-year U.S. Treasury bond, which expires on December 27. In the past few days, the open interest for February options has also been increasing, with the option expiring on January 24, the week President-elect Trump is inaugurated.
Open contracts (the number of open contracts held by traders) have been increasing, particularly between the 107.50 and 109.50 strike prices for January and February options. These price levels aim for a 10-year Treasury yield range of about 4.45% to 4.75%, while currently around 4.3%. The upper limit of this range would push yields above the 2024 high of approximately 4.74% reached in April.
On Tuesday, a more bearish position was executed, targeting a yield of as high as 4.9%, with a premium of $2.5 million. For over a year, the benchmark yield of U.S. Treasury bonds has not reached such high levels.
These bets remind people that although U.S. Treasury yields have retraced much of their major post-election gains, investors are well aware that the so-called 'Trump trade' could regain traction. For months, the premise of this trade has been that Trump's policies, including tougher tariffs, will accelerate inflation and push up yields.
In addition to Trump's inauguration, several other significant events will be key for these options bets. Firstly, next week's November non-farm payroll data report is expected to show a substantial increase in employment numbers compared to last month. There is also the Federal Reserve's policy announcement on December 18. To traders, it's like flipping a coin whether the Fed officials will cut rates by 25 basis points or hold steady in light of signs of economic recovery.
Meanwhile, according to a survey by JPMorgan to its clients, bearish sentiment in the cash market for Treasury bonds has been increasing and is currently at its most bearish level in a month. This week, hedge funds' net short positions per basis point on 2-year, 5-year, and 10-year Treasury bond contracts amount to about $15.6 million.
U.S. Treasury bonds fell slightly on Tuesday after Trump threatened to impose additional tariffs on U.S. trading partners, with the 10-year Treasury yield rising slightly. Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, said, 'All else being equal, tariffs would put upward pressure on inflation and downward pressure on economic growth. The actual rise in inflation is something market participants generally did not anticipate; I think this could be the biggest surprise.'
Article forwarded from: Jin Shi Data