(Bloomberg) -- A bearish tone is taking hold in Treasury options as traders bet that a crucial stretch ahead — with the US presidential election just days away — will deepen losses in bonds and spark bouts of increased volatility.
Yields have already surged this month, in part on speculation that the winner of the Nov. 5 vote will boost fiscal stimulus, spurring quicker growth and inflation and swelling the supply of Treasuries.
But options traders see the risk of an even steeper selloff. They’re targeting a 4.5% yield on the 10-year note, which would be the highest since May. The evidence of that can be seen in open interest — the amount of new positions held by traders. That measure has been growing in recent sessions in put contracts with a strike price that equates to a jump of about 0.20 percentage point above the current level of roughly 4.3% by the end of November.
Positioning in that 109.50 put strike is currently the most elevated in the 10-year December options, largely because of a position that traded a couple of weeks ago for a $16 million premium. There has been some fluctuation in the position, but open interest remains elevated at approximately 107,000 options, a sign that traders are holding onto hedges covering a bigger bond-market slump.
The coming days bring plenty of risks on top of the US election, including labor-market figures Friday that will help traders gauge the likely extent of additional Federal Reserve interest-rate cuts, and then the central bank’s Nov. 7 policy decision.
Mixed in with demand for wagers on higher yields, pockets of volatility hedging have emerged as well, including a $5 million options package that expires at the end of the week. The ICE BofA Move Index, a closely watched gauge of US bond-market volatility, closed at the highest levels this year on Monday, showing that traders are paying up to protect against increased turbulence.
The prospect of larger gyrations ahead may extend a move toward deleveraging in the futures market. Meanwhile , in the cash market, traders are also taking chips off the table with a shift to more neutral positioning, according to the latest survey from JPMorgan Chase & Co.
Here’s a rundown of the latest positioning indicators across the rates market:
JPMorgan Survey
In the week through Oct. 28, JPMorgan’s poll of clients’ Treasury positions showed shorts and longs being cut by 4 percentage points and 2 percentage points, respectively, moving into neutral positions.
Most Active SOFR Options
The largest positioning shift in options open interest linked to the secured overnight financing rate was seen in the 95.75 strike, where open interest rose sharply in both calls and puts on the Dec24 tenor. Flows over the past week have included a large buyer of the SFRZ4 95.5625/95.625/95.6875/95.75 call condor, which also accounts for the gains on the week seen in the 95.5625 strike. Other standout flows over the past week included a large buyer of the SFRZ4 95.8125/95.75/95.6875/95.5625 put condor.
SOFR Options Heatmap
In SOFR options out to the June 2025 tenor, the 95.75 strike is now the most populated due to recent demand for put and call condor options in the Dec24 tenor. The 95.50 strike also remains heavily populated with large build- up also in both Dec24 calls and puts into the strike.
CFTC Futures Positioning
Asset managers extended net duration long in Treasury futures positioning by roughly 71,000 10-year note futures equivalents in the week to Oct. 22, Commodity Futures Trading Commission data shows. Meanwhile, hedge funds covered net duration short by approximately 7,000 10-year note futures equivalents. The data showed a continued divergence in the front-end of the curve over the reporting week, with asset managers adding to net longs, while hedge funds ramped up a net short position by the same amount.
Bond-Put Premium Elevated
The premium to hedge a selloff in the long-end of the curve remains elevated relative to shorter-dated tenors and close to the most expensive this year in terms of the price of long-bond puts versus calls.
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