Bond traders are leaning toward higher Treasury yields over the next few weeks, positioning for the 10-year rate to exceed 5% and potentially reach much loftier levels.
(Bloomberg) — Bond traders are leaning toward higher Treasury yields over the next few weeks, positioning for the 10-year rate to exceed 5% and potentially reach much loftier levels.
In rates options over the past week, traders bought a number of bearish hedges for new risk as the Treasury market extended its selloff. On Wednesday, the 10-year yield climbed to 4.85%, a level last seen in 2007, extending gains in the previous session after stronger-than-anticipated US labor-market data reinforced expectations that the Federal Reserve will keep interest rates higher for longer.
Most of the options action has been in November and December expiries, which have seen a jump in open interest across a number of put-option strikes equivalent to a 5% yield and higher. One position — consistent with a deep out-the-money tail risk hedge — matched a strike price equivalent to a 10-year yield as high as 8% by the end of November. The yield hasn’t been that high since 1994.
Bearish sentiment is also gripping the cash market. JPMorgan Chase & Co.’s latest Treasury client survey released Tuesday showed the largest outright short stance since Aug. 14, and the smallest net long positioning since April.
In futures, Commodity Futures Trading Commission data through Sept. 26 shows no sign that asset managers are rebalancing a net long position, following changes in the Treasury security that is cheapest-to-deliver on the classic-bond contract.
Here’s a rundown of positioning in various corners of the market:
Put Options Buildup
The past week in the options market has seen a jump in open interest — or the amount of new risk — in numerous Treasury 10-year put strikes, hedging a move higher in yields. Stand-out flows have included activity in both the November and December tenors, including positioning for a 5% yield by the end of November.
JPMorgan Survey Shows Treasury Shorts Rising
Bearish sentiment has also been filtering through to the cash Treasuries market. Tuesday’s release of JPMorgan’s Treasury client survey showed a rise in outright short positions to the most in seven weeks, while the net long position shrank to the slimmest since April. Tuesday’s session saw yields in the five-year out to the long-end of the curve extend to fresh cycle highs.
Limited Asset Manager Rebalancing
Over the week, asset manager positioning was little changed, adding around 15,000 10-year note futures to a net long across the curve. That means no sign of portfolio rebalancing linked to soaring Treasury yields and potential switches to the cheapest-to-deliver security on the long-bond futures. Hedge funds added to their net short duration by around 56,000 10-year note futures equivalents.
Monday’s session saw an influx of SOFR Dec23 call condor structures, which open interest showed to be new risk. In Dec23 out to Jun24 SOFR options, the 95.00 strike remains the most populated among puts and calls. Over the past week, traders have targeted upside protection in SOFR options, fading the selloff in front-end rates which has seen rate-hike premiums edge higher for the remaining Fed policy decisions this year.
(Updates Treasury levels)
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