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(Bloomberg) — Traders are piling into bets that long-term Treasury yields will surge on concerns over the US government’s swelling debt and deficits, a situation made more precarious by President Donald Trump’s tax-cut bill.
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The murky economic outlook is fueling hedging activity in Treasury options, with investors targeting higher rates on longer-dated bonds by the end of the year. The latest spurt of downside wagers echoes sentiment on Wall Street where strategists from Goldman Sachs Group Inc. to JPMorgan Chase & Co. are lifting their forecasts for yields.
Plays favoring the 10-year yield (^TNX) testing 5% are among some of the bigger positions. Monday’s CME open interest data confirmed a large wager on 10-year yields rising toward 5% in the coming weeks, indicating new risk for a heavy premium of $11 million. Over the past week, a trend of options flows hedging a move higher in yields has emerged, reflected in the so-called options skew, which shows rising premiums to reflect a bond market selloff.
“Given trade and monetary policy uncertainty amid a structural shift in the demand landscape, the risks are skewed toward bearish steepening over the near term,” JPMorgan strategists including Jay Barry and Jason Hunter wrote in a note.
On Monday, the 30-year yield (^TYX) briefly eclipsed 5% to reach its highest level since November 2023 before paring the move, during a selloff sparked by Moody’s Ratings cutting the US credit score to Aa1 from Aaa. The downgrade drove yields of all maturities higher in early trading Monday before wiping out increases.
“The bond market is going to have the final say on what happens fiscally,” Garda Capital Partners’ Tim Magnusson said in an interview at the firm’s New York office. Lawmakers “are going to get tested more — 5% is not the final line in the sand.”
Premiums to protect against bigger losses on the long-end of the Treasury curve are now at their highest level since April, when markets were shaken by the potential economic fallout from Trump’s aggressive trade policies. The current move in options skew means that traders are driving up the price of puts that hedge against the risk of a yield spike, relative to call options that would profit from the opposite.
Tuesday’s JPMorgan Treasury client survey also highlights the expectation for higher bond yields, with outright short positions climbing to the highest since Feb. 10. With investor positioning more neutral than in early April however, the JPMorgan strategists expect “significantly smaller moves than experienced last month.”