Deep Sell-Off Incoming in Weeks?

2024-11-02
News

Deep Sell-Off Incoming in Weeks?

The bearish sentiment is gaining dominance in the interest rate options market, indicating that bond traders are preparing for another surge in U.S. Treasury yields in the coming weeks. There has been a consistent demand for utilizing U.S. Treasury options to hedge with put structures in the January contract for the 10-year U.S. Treasury bond expiring on December 27. Over the past few days, positions in the February options have also been increasing, which will expire on January 24, that week.

Between the strike prices of 107.50 - 109.50 for January and February options, the open interest or the outstanding positions held by traders has been increasing. This level targets a 10-year U.S. Treasury yield of approximately 4.45% to 4.75%, while the current yield is around 4.3%. The upper limit of this range would push yields past the 2024 high of about 4.74% touched in April this year. On Tuesday, a more bearish position emerged in the market, targeting a yield as high as 4.9%, with a premium of $2.5 million. The benchmark 10-year U.S. Treasury yield has not reached such a high level in over a year.

These bets remind people that, despite the pullback after the rise in yields, investors are well aware that the so-called trade could gain traction again. For months, the premise of this trade has been that his policies, including raising tariffs, will accelerate inflation and push up yields. After threatening to impose additional tariffs on U.S. trade partners, U.S. Treasuries fell slightly on Tuesday, and the 10-year U.S. Treasury yield rose slightly.

Aside from the first few days of next month, there are several other events in the future that will be key to these option bets. First, the November non-farm employment data to be released next week is expected to show a significant increase in the number of jobs compared to the previous month. Then comes the Fed's policy statement on December 18. Traders believe it's a coin toss whether officials will cut rates by another 25 basis points or hold steady in light of signs of economic recovery.

Meanwhile, a survey of clients by JPMorgan shows that in the spot market, short positions have been increasing, and they are now at the highest level in a month.

Here is an overview of the latest position indicators in the interest rate market:

JPMorgan U.S. Treasury Client Survey

In the week ending November 25, JPMorgan's clients' short positions expanded by 2 percentage points, reaching the highest level since October 28. Neutral positions fell to the lowest since October 21 this week, and long positions also rose by 2 percentage points.

U.S. Treasury options premium skews towards put options

In recent trading sessions, the premium for hedging actions in the bond market has skewed towards put options, as investors have demand for options on rising yields in the coming weeks. There has been a significant influx of buying in 10-year U.S. Treasury options for January and February, targeting yields rising to a high of 4.9%. Tuesday's actions included the purchase of put options for January and February, with a total premium of $5 million for both trades.

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