Traders Brace for Lower Treasury Yields as Hedging Costs Rise

Bond traders are preparing for Treasury yields to drop further even as the 30-year reached its lowest level in six months on Tuesday.

The cost of protection against a bigger decline in yields across the curve is rapidly rising, according to pricing of options wagers. With the US government shutdown on its way to becoming the second longest on record, renewed concerns over the credit market and heightened US-China trade tensions, traders are piling into quality, risk-off assets. The advance in the Treasury market is pushing yields across the curve lower.

Over the past week, the cost of Treasury call options rose sharply relative to puts. That skew in favor of calls remains close to the most extreme levels last seen in early April when President Donald Trump announced global tariffs.

“In terms of positioning the tactical setup is clear — long everything with the market rapidly chasing the richening moves” in US bonds, Citi strategist David Bieber wrote in a Tuesday note.

Increased hedging by traders who sold protection against a further decline in yields can also trigger more buying of Treasuries. Recently, there was a flurry of hedges targeting 10-year yields to fall below 4%.

In the December 10-year Treasury options, recent flows have reflected traders moving positions to target a deeper rally, as yields extended under the 4% handle last week, reaching 3.93% and lowest in about six months. The bullish positioning reflects a scenario of 10-year yields dropping as low as 3.75% to 3.70%, shown by rising open interest in the 115.00 and 115.50 December options call strikes.

Yields on US 10-year bonds were one basis point lower at 3.96%, while 30-year peers were steady at 4.54% at 5:55 a.m. in New York

Meanwhile in the cash market, a JPMorgan survey released Tuesday showed outright short positions edge up and long positions drop, also keeping the bond market susceptible to short covering rallies.

Here’s a rundown of the latest positioning indicators across the rates market:

JPMorgan Survey

For the week ended Oct. 20, short positions rise 2 percentage points and long positions drop by the same amount. The all-client survey now shows the net long position as smallest since Aug. 25.

Most Active SOFR Options

In SOFR options across Dec25, Mar25 and Jun26 tenors, the past week has seen the most activity in the 96.5625 strike where Dec25 call open interest has rapidly increased. Recent flows around the strike have included buyer of 96.50/96.5625 call spreads and buyer of 96.5625/96.75 call spreads in positions which look to target a potential 50 basis point rate cut at the December Fed policy meeting. There has also been decent rise in open interest on 96.75 Mar26 calls with recent flows including buyer of the 96.75/97.00/97.125 2x1x2 call tree.

SOFR Options Heatmap

In SOFR options across Dec25, Mar26 and Jun26 tenors, the 96.50 strike remains the most populated, largely due to a huge amount of Dec25 calls in the strike. Recent flows have included outright buying in the SFRZ5 96.50 calls and buying of the SFRZ5 96.50/96.5625 call spreads and SFRZ5 96.50/96.625 call spreads. There is also elevated open interest in the 96.25 Dec25 calls and puts, with recent flows including buyer of the Dec25 96.375/96.25 1x2 put spread for new risk.

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Bloomberg News provided this article. For more articles like this please visit bloomberg.com.

Traders Brace for Lower Treasury Yields as Hedging Costs Rise

JPMorgan Survey

Most Active SOFR Options

SOFR Options Heatmap

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