Data released this week confirmed heavy buying in one March 10-year options contract over the past week
by Edward Bolingbroke
Traders are loading up on Treasury options targeting a bond rally that would send US 10-year yields back to 4% in coming weeks, a level not seen since the end of November.
CME open interest data released Monday confirmed heavy buying in one March 10-year options contract over the past week. The total premium paid on the position so far is unusually large at approximately $80 million, and open interest, or new positioning held by traders, has soared to 171,153 options — a 300% rise in a week.
The bullish wager comes even as US yields have ticked higher in recent weeks, with the 10-year note topping out near 4.20% earlier this month. It has since fluctuated as investors weigh the latest economic data and sift through Federal Reserve commentary for clues on the extent and timing of further interest-rate cuts.
Yields ended the session Monday about two basis points higher across most tenors, pushing the 10 year’s to 4.16%, after a $69 billion auction of two-year notes that saw solid demand.
Volatility in the Treasury market has been very subdued, reflected by the Bank of America MOVE index, which has tumbled to the lowest level more than four years. While there isn’t much in the way of fresh major data expected through year-end, the release of the December US employment report early next month has the potential to jolt Treasuries out of their recent range and move the options closer to being in the money.
The March Treasury options expire Feb. 20, after the Fed’s January policy meeting, allowing traders to use them as a tool for betting on changes in rate expectations. Monday’s session also saw demand for a similar wager, this time targeting 10-year yield move to around 4.05% for a premium of $28 million on the one trade.
Copyright Bloomberg News
