Traders have been adding options wagers that yields will retreat from the 14-month highs reached in the wake of robust US jobs report . — Reuters
SOME bond traders are betting that the relentless sell-off in Treasuries will soon lose momentum, in part because of questions around how President-elect Donald Trump’s policies will take shape.
Traders have been adding options wagers that yields will retreat from the 14-month highs reached in the wake of last Friday’s robust US jobs report, which dashed expectations for further Federal Reserve (Fed) interest-rate cuts any time soon.
One stand-out trade on Tuesday, costing a premium of more than US$40mil, targeted a drop in 10-year yields to 4.6% by Feb 21, from roughly 4.8% now.
Yesterday brought the next pivotal data point, with the release of the latest consumer-price figures, which were forecast to show inflation remains sticky.
Bonds have been slumping since early December, driving the 10-year yield up from around 4.15%, on signs of a resilient economy and speculation that Trump’s proposals will spur even quicker growth.
There’s also concern that his tariff plans will reignite inflation.
However, a report on Monday that his administration may implement tariffs gradually signalled the potential for a reduced inflationary impact, giving Treasuries a brief boost.
The report drove home how much uncertainty there is around the policy mix investors will face under Trump.
Bonds also drew fleeting support on Tuesday from a cooler-than-projected report on producer prices.
All the lingering questions about the coming year are leading bond investors such as Pacific Investment Management Co to predict attractive returns ahead, while one prominent bear, RBC BlueBay Asset Management, has said it’s time to take some chips off the table.
In a sign of increasing bullishness in the cash market, JPMorgan Chase & Co’s latest client survey showed long positions increasing to the biggest in over a year, while short positions dwindled.
Meanwhile, in options linked to the Secured Overnight Financing Rate (SOFR) – which closely tracks the Fed’s expected policy path – some traders have started to position for a more dovish outlook than the current market consensus.
The swaps market is pricing in just one more quarter-point of easing for the current policy cycle, but trades this week have targeted at least two more cuts this year.
Here’s a rundown of some positioning indicators across the rates market:
> JPMorgan Treasury Client Survey.
In the week to Jan 13, JPMorgan clients’ outright long positions increased by a percentage point to the most since December 2023, while outright short positions fell two percentage points.
The net long position now stands at the highest since Nov 4.
> Treasury Options Premium Favouring Puts.
The cost to protect against a sell-off in the long end of the Treasury curve continues to trade at a premium to the front and the belly.
The options skew favouring puts in the long-bond contract remain close to the most elevated levels this year.
The move matches the grind higher in Treasury yields following last Friday’s jobs report, which put a 5% 10-year yield back on traders’ radar.
> CFTC Futures Positioning.
In CFTC data to Jan 7, hedge funds aggressively covered short positions across the futures strip by a risk amount equivalent to approximately 263,000 10-year note futures, the heaviest short covering since the end of November.
On the flip side, asset manager net long positions were unwound by approximately 125,000 10-year note futures equivalents. — Bloomberg
Edward Bolingbroke is a Bloomberg Opinion columnist. The views expressed here are the writer’s own.
