For the week ending January 12, the options market is betting that the 10-year US Treasury yield will rise to 4.1%.
Before the December inflation data was released on Thursday, options traders were turning to short-term options to hedge against the risk of rising yields.
According to Bloomberg, demand for short-term options in the options market rose sharply in the first two weeks of this year to hedge against the risk of US bond auctions and inflation data.
For the week ending January 12, the strongest demand in the options market was the $111.5 put option, which is equivalent to betting a 10-year US Treasury yield of 4.1%.
Bloomberg believes that the market rebound at the end of last year aroused investors' bullish sentiment, and there are still a large number of potential long positions in the US bond market. Therefore, compared to directly betting on US bonds, they prefer to choose short-term options, leading to an “aggressive buying” situation.
Since this year, there has been a wave of US bond sell-off against the backdrop of interest rate cuts cooling down and employment data recovering beyond expectations, causing yields to rise again. Also, considering the risks that December inflation data may bring, put options have risen sharply and surpassed bullish options since this year.
Bloomberg pointed out that in a few trading days at the beginning of this year, the bias in futures fell from bullish to neutral. In terms of long-term options, premiums tend to hedge against the downside risk of US bonds.
J.P. Morgan's customer survey for the week ending January 8 showed the same trend: since the beginning of the year, neutral positions rose to their highest level in about 4 months. Previously, call options were more popular.
Citigroup strategists Ed Acton and Bill O'Donnell stated in a Monday report:
“The current tactical position is moderate and long. Short profits are offset by losses from long positions, and the risk is now balanced.”
Overnight, the 10-year US Treasury yield rose above 4.05% in the intraday period. The 2-year US Treasury yield, which is more sensitive to interest rate prospects, rose nearly 2 basis points during the day, but eventually closed down.
Editor/Somer