Major news came one after another this week, and bond traders are betting that the market will usher in a sharp sell-off

Zhitong Finance ·  Jan 31 14:41

Source: Zhitong Finance

Due to fears that US Treasury yields will rise in the next few days and months, bond traders have very tight schedules for risk events for the second half of this week.

This is the trend of US bond options so far this week. Ahead of Wednesday's US bond refinancing announcement and the Federal Reserve's interest rate decision, there was a huge demand to pay high premiums in the bond market. The risks don't stop there, as the January employment report will also be released this Friday.

The prominent capital inflows on Monday and Tuesday were heavily biased against put options on US Treasury bonds, with the goal of rising 10-year Treasury yields to a high of 4.45%. One such investment appears to be extremely bearish, aiming for 10-year Treasury yields to rise to 4.3% at the close of Friday. Here's a summary of this week's outstanding funds:

Traders hedge against rising US Treasury yields

The increase in bearish hedging coincides with the background of potential bulls in the US Treasury bond market, as the recent pattern of open futures contracts shows interest in buying on dips, and new risks have emerged as 10-year Treasury yields break through the 4.15% region.

Some time ago, SOFR traders had been reducing their holdings before Wednesday's policy statement. After price changes occurred after US job data was released on Tuesday, the chance of cutting interest rates by 25 basis points in March is currently around 35%.

Meanwhile, in the spot market, J.P. Morgan Treasury's latest survey showed that in the week ending January 29, customer long positions rose, shifting from high neutral positions.

Here are the latest positions across the market:

Hedge funds increase SOFR longs

According to data from the US Commodity Futures Trading Commission (CFTC) for the week ending January 23, positions in the SOFR futures complex are still seriously divided. Hedge funds have increased net long positions, while asset managers have increased their net short positions. The risk of leveraged SOFR net long positions increased by about $3.1 million per base point, and changes in positions remained largely unchanged outside the curve.

Overall long-term changes this week show that asset management companies added 27,000 10-year futures equivalents to net long positions, and hedge funds added 11,500 10-year futures equivalents to net short positions.

Active in bulk transactions

Commodity trading continues to be active, and demand for 2-year treasury bond futures has been significant in the past week. Monday's action included two large 2-year deals with a total risk of $850,000 per basis point. The unclosed contracts appeared to be short compensation.

The slope favors long-term sell-off

As traders continue to pay higher premiums to hedge against the sell-off of long-term bonds, the recent trend of long-term options favoring put options has remained unchanged over the past week. Put option premiums on some long-term bonds may begin to partially reflect a shift in long-term bond futures contracts with the lowest delivery cost, and hedge against this situation.

March SOFR call options

This past week's options activity saw SOFR's surge in the risk of 94.9375 call options on March 24, which led the increase in open positions this week.

SOFR options heatmap

Overall, the open options SOFR as of September 24 continued to show that 95.00 was the most popular exercise point, where there was significant exposure to March 24 call options.


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