Treasuries held on to recent losses ahead of the US inflation report, with traders loading up on bets for further declines in anticipation that Donald Trump’s pledged policies will fan price increases and keep interest rates high.
US yields were stable across the curve after jumping about 10 basis points on Tuesday. The two-year rate was at 4.34%, near the highest since July, and gauge of Treasury returns was only 0.7% away from wiping out its year-to-date gains.
Open interest — the amount of outstanding contracts — on Treasury futures suggest traders have been adding to short bets on US bonds since the election, and in advance of a report Wednesday that is expected to show inflation slightly picking up in October. This indication of positioning rose for a fifth-consecutive session in the two-year contract, preliminary data released on Wednesday show.
“It’s plausibly in the near term yields can rise to 4.6%,” said Henry Allen, a macro strategist at Deutsche Bank AG, in a Bloomberg TV interview. “There’s definitely upside risks on that because you’ve got the tariffs coming in, you’ve got fiscal stimulus coming down the tracks.”
Inflation has returned to focus as investors assess Trump’s vowed policies, like tax cuts and tariffs, that could fuel price pressures and force the Federal Reserve to keep rates elevated. Traders are pricing in just over a 50% chance of another quarter-point cut in December, and the yields on two- and five-year Treasuries returned to their highest levels since July.
The CPI data for October has the potential to further dent expectations for a December cut, with a hotter-than-expected reading likely to push up forecasts for two-year Treasury yields through 2025, according to Scott Johnson, deputy head of global modeling for Bloomberg Economics.
Minneapolis Fed President Neel Kashkari said on Tuesday he’ll be looking at incoming inflation data to determine whether another rate cut is appropriate at the December meeting. It may take a year or two for price gains to reach that target given the above-average pace of housing inflation, he said, though he called a cooling there “encouraging.”
Scott Kleinman, co-president at Apollo Global Management Inc., told Bloomberg Television that markets shouldn’t get too comfortable with the current trajectory of inflation and interest rates.
Bearish traders have so far been targeting shorter-maturity debt, such as the two- and five-year notes contracts. In two-year note futures, open interest has climbed nearly 220,000 contracts over the past five sessions.
“We see investors chasing the price action,” Citi strategist David Bieber wrote in a note. “This is a market that was correctly positioned for the election result, but was broadly under-invested” in short bets on the Treasury market.
Here’s a rundown of the latest positioning indicators across the rates market:
Bond-Put Premium Closer to Neutral
The premium to hedge a selloff in the long-end of the curve remains slightly elevated relative to shorter-dated tenors. Still, it continues to move closer to neutral after retreating from the most expensive this year seen recently in terms of the price of long-bond puts versus calls. There has been some heavy selling of long-bond puts over the past week, reflecting profit-taking on bearish wagers a few weeks ago as Treasury yields surged to multi-month highs in the wake of Trump’s reelection.
Most Active SOFR Options
Heavy risk has been built over the past week in a couple of Dec25 call strikes following flows which have included 100,000 SOFR Dec24 95.625/95.6875 call spread bought at 2.5 ticks, which open interest showed as new risk. Additional upside seen over the past week has included risk being built in the 95.50 strike following heavy buying of the SFRZ4 95.50/95.625 call spread.
SOFR Options Heatmap
In SOFR options out to the June 2025 tenor, the 95.50 strike is now the most populated following new risk appearing as part of the SFRZ4 95.50/95.625 call spread buyer over the past week and also recent demand for the SFRZ4 95.5625/95.50/95.4375/95.375 put condor. The 95.75 strike also remains well populated due to demand for put and call condor options in the Dec24 tenor.
CFTC Futures Positioning
Asset managers added to net long duration by approximately 26,000 10-year note futures equivalents in the week up to Nov. 5, while hedge funds covered approximately 150,000 10-year note futures equivalents to net short as traders positioned into the US election result. Largest amount of short covering was seen in the 10-year note futures for a risk weighing of $8.5m/DV01.
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