Yahoo Finance Traders Flock to a Trump-Fueled Bet on Higher US Bond Yields
(Bloomberg) -- Traders in the $27 trillion Treasury market are betting on higher long-term bond yields as Wall Street starts to adjust for Donald Trump’s potential return to the White House.
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Investors have been buying shorter-maturity notes and selling longer-term ones after Trump came out ahead of President Joe Biden in the first presidential debate. It’s a wager — known as a steepener trade — that’s been gaining momentum ever since.
Open interest, or the amount of risk held by traders, climbed sharply on Friday and Monday as the gap between the two- and 10-year yields widened. That resulted in about 13 basis points worth of curve steepening, the biggest such two-day move since October. That move pared slightly as the week progressed with front-end yields inching higher on Wednesday.
“It’s still too soon to fully price in an election outcome — but probably not too early to leg into it,” said Subadra Rajappa, head of US rates strategy at Societe Generale SA. “The recent move is a bear steepener and seems to be the market assigning higher odds of a Trump win.”
The trade has been touted by a chorus of Wall Street strategists in recent days, with Morgan Stanley and Barclays urging clients to prepare for sticky inflation and higher long-term bond yields in another Trump term.
As the bet gained momentum in the market, open interest surged a combined $15.7 million per basis point in risk — a metric that indicates trader appetite for fresh steepener trades. It also suggests that the recent ebb in longer-dated Treasuries was driven by fresh short positions.
Trading in many of these notes is anonymous, making it difficult to identify the firms behind those bets. Still, the data showed a large futures block steepener on Friday that appears in line with bets on a steeper yield curve.
The cash market is seeing similar momentum, according to JPMorgan Chase & Co. data. The bank’s latest survey of clients showed a 5-percentage-point drop in the number of bets for a bond rally, taking the net long position to the smallest since June 10.
In the options market, traders are paying the most expensive premium in a month to hedge against a selloff in the bond futures contract.
Here’s a rundown of the latest positioning indicators across the rates market:
JPMorgan Clients Less Bullish
In the week ending on July 1, JPMorgan clients reduced long positions by 5 percentage points, marking a shift into neutral positions. Short bets were unchanged in that period. The net long position dropped to lowest since June 10.
Options Premium Shifts to Puts
The premium paid to hedge risk in the long-end of the curve has flipped from calls to puts. Traders are now paying the highest price to hedge a selloff in the long-end of the curve since the end of May, just as US 30-year yields peaked above 4.65%. A standout flow over the past week was a bearish position that target 10-year yields as high as 4.55% by Aug. 23 expiry.
Hedge Funds Extend Net Futures Short
Leveraged accounts extended their net short position in the ultra-long bonds to the most since 2022, according to Commodity Futures Trading Commission data in the week up to June 25. On the week, the overall net short was extended by hedge funds by roughly $10.8 million per basis point in risk. Asset managers were net long over the week to the equivalent of 93,000 10-year note futures, with notable bullish positions added across intermediates.
Active SOFR Options
Over the past week largest open interest gains were seen across a number of Sep24 put strikes, helped by flows including SFRU4 94.875/94.75/94.625 put flies, SFRU4 94.6875/94.625 1x2 put spreads, SFRU4 94.875/94.8125/94.75 put flies and SFRU4 94.8125/94.6875/94.5625 put flies. Largest liquidations over the week were seen in the 97.00 and 96.00 strikes related to a couple of large condor trades seen June 27, which appeared consistent with position adjustments.
SOFR Options Heat Map
In SOFR options out to the Mar25 tenor, heaviest amount of open interest now sits at the 94.625 strike following recent flows including SFRU4 94.6875/94.625 1x2 put spread and SFRU4 94.875/94.75/94.625 put fly, along with the SFRU4 94.6875/94.625 1x2 put spread which was also active last week. The 96.00 strike also remains active, with flows being the 4% rate including the SOFR Mar25 96.00/95.50/95.00 put fly and the SOFR Sep25 96.75/96.00/95.25 put fly. Popular trades have also included the SOFR Dec24 96.00/97.00 call spreads which traded back in May.
--With assistance from Carter Johnson.
(Updates with cash bond moves in third paragraph.)
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