In This Article:
(Bloomberg) — The growing unease around US assets that has sparked a selloff in long-term government bonds and sent yields soaring is showing up in the options market, where premiums to protect against even bigger losses are at their highest since the “flash crash” of 2021.
Most Read from Bloomberg
-
Trump Gives New York ‘One Last Chance’ to End Congestion Fee
-
DOGE Visits National Gallery of Art to Discuss Museum’s Legal Status
The so-called option skew on Treasury bonds has blown out considerably, with investors aggressively 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. The last time the skew was favoring puts this much was Feb. 25, 2021 — the day of an unusual “flash” event in US Treasury markets that featured a sudden drop in prices amid strained liquidity conditions.
The extreme positioning reflects a deepening angst among many investors, whose confidence in US assets has been shaken by concerns over the potential economic and market fallout from US President Donald Trump’s aggressive trade policies and his increasing pressure on the Federal Reserve Chair Jerome Powell to cut interest rates. Meanwhile, the US fiscal outlook remains challenging, leading traders to demand more compensation for the risk of owning long-term Treasuries. That can be seen in the rise in so-called term premium.
Investors exiting positions amid the recent market turbulence and policy worries has also added to the upside pressure on yields in recent sessions. The yield on the US 30-year bond stood at 4.88% as of Tuesday afternoon in New York, near a three-month high.
“There is no doubt foreign selling out of U.S. dollar assets has occurred and added to market volatility,” said Lawrence Gillum, chief fixed-income strategists for LPL Financial. “Throw in concerns about Federal Reserve independence and potentially an unforced policy error by cutting rates too soon, and it makes sense longer maturity Treasury yields have continued to move higher.”
A lack of conviction in Treasuries is also evident in the cash market. JPMorgan’s weekly client survey showed neutral positions rising to the most so far this year.
To be sure, positions in options markets can quickly revert. The severe market dislocations that sprung up in 2021 were short-lived, and a similar dynamic could play out now,should trade negotiations lead to new accords and if Trump eases back on his war of words against Powell’s Fed. On Tuesday, stocks rose and long-term yields edged slightly lower as traders channeled optimism — at least for a day — that the White House will clinch trade deals with key partners.