This week, the yield curve steepened by about 13 basis points due to the widening spread between the two-year and ten-year Treasury bond yields, marking the largest two-day volatility since October of last year.
As Trump performed better than Biden in the first presidential debate, Wall Street began to price in the possibility of Trump's return to the White House, with one of the most popular trades being a bet on a steepening yield curve.
Investors began buying short-term bonds and selling long-term bonds in large numbers this week. The difference between the two-year and ten-year treasury bond yields is widening, causing the yield curve to steepen by about 13 basis points, the largest two-day volatility since October of last year.
Wall Street is bullish on this trade, with Morgan Stanley and Barclays urging clients to prepare for sticky inflation and higher long-term bond yields during Trump's next term. Subadra Rajappa, the head of US rate strategy at Societe Generale, said,
"It's too early to price the election outcome, but the recent trend is a bear steepening, suggesting that the market believes Trump has a higher chance of winning."
Currently, the yield on two-year treasury bonds in the US is 0.752%, up 1.3 basis points from the previous trading day. The yield on ten-year treasury bonds is 4.428%.
Institutional analysts believe that Trump's main policy goals of cutting taxes, increasing tariffs, limiting immigration, and lowering interest rates could create an environment of loose fiscal and monetary policy, resulting in high inflation and sustained high interest rates.
According to institutions, funds that had been betting on a flattening US bond curve have been closing out their positions in concentration.
With the US bond curve inverting and the slope mainly concentrated at the front end, trading strategies that flatten the curve can generate very good carry, attracting funds and potentially leading to trends and crowding. However, once long-term yields rise, curve-flattening trades may be closed out in concentration, leading to a rapid steepening of the US bond curve.
According to the media, as the market continues to increase its bet on a steepening curve, the amount of risk in open positions per basis point has soared to $15.7 million, showing traders' interest in the new steepening trade and indicating that the recent drop in longer-term US bond prices is driven by new short positions.
According to JPMorgan's data, the spot market is also seeing a similar trend. Customers' bet on a bond rebound has decreased by 5 percentage points, reducing the net long position to its lowest level since June 10th.
In the options market, traders are paying the highest premium in a month to hedge against the sell-off of bond futures contracts.
Editor/Somer