A bearish tone is forming in the interest rate options market, indicating that bond traders are preparing for a surge in usa Treasury yields in the coming weeks.

In the 10-year usa Treasury bond January contract expiring on December 27, the demand for bearish hedging using the bearish structure of Treasury bond options has remained steady. Over the past few days, the open interest for February options has also been increasing, which will expire on January 24, the week when President Trump will be inaugurated.

Open interest (i.e., the number of outstanding contracts held by traders) has been increasing, especially between the 107.50 and 109.50 put strike prices of the January and February options. These price levels target a range for the 10-year usa Treasury yield of about 4.45% to 4.75%, while it is currently around 4.3%. The upper limit of this range would push yields past the 2024 high reached in April—approximately 4.74%.

On Tuesday, a more bearish position was executed, targeting a yield as high as 4.9%, with a premium of 2.5 million dollars. The benchmark yield on usa Treasury bonds has not reached such high levels in over a year.

These bets remind that, although usa Treasury yields have retraced much of the major increase post-election, investors are very aware that the so-called 'Trump trade' could regain traction. For months, the premise of this trade has been that Trump's policies, including stricter tariffs, will accelerate inflation and drive up yields.

In addition to Trump taking office, there are a few other significant events that will be key to these options bets. First, next week's November.non-farm payroll dataThe report is expected to show a significant increase in employment numbers compared to last month. There is also the Federal Reserve's policy announcement on December 18. From the traders' perspective, it is like flipping a coin whether the Federal Reserve officials will cut interest rates by 25 basis points or remain steady in the face of signs of economic recovery.

Meanwhile, according to a survey by jpmorgan of its clients, the bearish sentiment in the U.S. treasury spot market has been growing, currently the most bearish it has been in a month. This week, the risk of net short positions per basis point by hedge funds in 2-year, 5-year, and 10-year U.S. treasury contracts is about 15.6 million dollars.

After Trump threatened to impose additional tariffs on U.S. trading partners, U.S. treasury bonds slightly fell on Tuesday, and the yield on the 10-year U.S. treasury bonds rose slightly. charles schwab's Chief Investment Strategist Liz Ann Sonders stated, 'All else being equal, tariffs will put upward pressure on inflation and downward pressure on economic growth. The actual rise in inflation is something market participants generally did not anticipate, and I think that may be the biggest surprise.'