Bond traders are increasingly investing in Treasury options that anticipate a drop in the 10-year yield to below 4 per cent in the coming weeks. This activity is driven by the expectation that forthcoming economic data will reveal weaknesses, potentially leading the Federal Reserve to cut interest rates as early as December. Investors are preparing for key updates on the labour market and inflation, coinciding with the reopening of the US government after its extended shutdown.
Traders actively acquired bullish hedges on Tuesday, despite the cash market’s closure for Veterans Day. One significant position, acquired at a total premium of $US45 million, is betting on the 10-year yield falling to as low as 3.9 per cent. On Wednesday, Treasuries experienced a rally, pushing the 10-year yield down to 4.06 per cent, following an opening gap lower due to the holiday. The ADP Research Institute’s weekly private-sector jobs data, released on Tuesday, indicated job losses, further fuelling the futures rally.
Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities, commented that Treasuries “have evolved back into a more normalised rate environment”. He added, “Inflation is going nowhere fast, jobs too and if I’m a policymaker, I’d play it cool with a bias lower.” Faranello does not exclude the possibility of 10-year yields dropping below 4 per cent again, a level previously breached in mid-October before rebounding.
Open interest in bullish options, reflecting the number of new positions held by traders, has risen sharply over the past week, indicating expectations of a significant Treasuries rally. These trades are concentrated in both December and January options, set to expire on November 21 and December 26, respectively.
