(Bloomberg) -- The price of options that protect against an extended slump in Treasuries is soaring as traders brace for a bevy of decisive events in the weeks ahead that have the potential to deepen the market’s losses.
Hedging is ramping before the release of a key batch of payrolls data next week, followed by the US election Nov. 5 and the Federal Reserve’s next policy announcement two days later. Benchmark 10-year rates touched the highest since July on Tuesday, but as traders see it now, the risk is for an even bigger jump in yields.
The bond market is reacting to signs of a resilient US economy, which is leading them to trim bets on the scope of Federal Reserve interest-rate cuts over the next 12 months. But investors are also hedging against a scenario where the election produces a unified Republican government that fuels quicker growth and inflation, matched with wider federal deficits and added Treasury supply.
In the Treasury options market, that backdrop is being reflected in the price of puts that protect against higher yields relative to that of calls hedging against lower yields. That skew in favor of puts is close to the most extreme levels this year.
A couple Treasuries options trades seen this week drive home the bearish tone. On Tuesday, one position targeted an increase in 10-year yields to roughly 4.75% within a month — the highest since April — from 4.2% now. On Monday, there was similar demand seen for options targeting a selloff in longer maturities.
The latest jump in yields has drawn added fuel from deleveraging in the futures market, which has also pushed the yield curve steeper. Open interest, a measure of new positioning held by investors, has dropped in 12 of the past 14 sessions in the 10-year contract — a signal that unwinding of long positions has fed into higher cash yields.
Here’s a rundown of the latest positioning indicators across the rates market:
JPMorgan Survey
In the week through Oct. 21, JPMorgan Chase & Co.’s survey of clients’ Treasury positions showed an increase for both outright long and short positions, with neutrals dropping 6 percentage points on the week. The number of shorts rose 4 percentage points to one of the highest readings this year, while outright longs rose 2 percentage points to the biggest in six weeks.
Most Active SOFR Options
The largest positioning shift in options open interest linked to the secured overnight financing rate was seen in the 95.8125 strike, largely a result of heavy buying over the past week in the SOFR Jun25 96.375/96.125/95.8125 put tree. Most of the buying in the position was seen Thursday last week, which open interest showed as new risk across all three strikes.
SOFR Options Heatmap
In SOFR options out to the June 2025 tenor, the 95.50 strike remains the most populated in terms of open interest with specific amount of risk held in both Dec24 calls and puts along with Mar25 puts. There has been a recent uptick in activity around the 95.75 strike, the second-most-populated following recent flows including a buyer of the SFRZ4 95.75/95.6875/95.625/95.5625 put condor.
CFTC Futures Positioning
Asset managers added approximately 54,000 10-year-note futures equivalents to net duration longs across the futures strip in the week to Oct. 15, Commodity Futures Trading Commission data shows. On the flip side, hedge funds added around 10,000 10-year note futures equivalents to net short positioning. Asset managers added $8.8m/DV01 to their net long position in ultra-long bond futures, where the largest positioning shift over the week was seen.
Bond-Put Premium Elevated
The premium to hedge a selloff in the long-end of the curve remains elevated relative to shorter-dated tenors. One stand-out options flow this week has been a bearish position in the long end, targeting 30-year yields to rise to around 4.75% over the next month — the highest since May — from roughly 4.5% currently. The position cost approximately $2.8 million premium via a buyer of bond contract puts, paying 36 ticks.
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