Traders in the $27 trillion Treasury market are increasingly betting on higher long-term bond yields in anticipation of Donald Trump potentially returning to the White House. Following Trump’s perceived victory over President Joe Biden in their first debate, investors have been shifting towards buying shorter-maturity notes and selling longer-term ones in what’s known as a steepener trade.
Open interest, a measure of trader risk, surged notably on Friday and Monday as the yield gap between two-year and 10-year Treasuries widened by approximately 13 basis points, marking the most significant two-day steepening move since October. Although the week saw some moderation with front-end yields edging higher on Wednesday, market sentiment continues to reflect heightened odds of a Trump reelection, described as a bear steepener trade.
This strategy has garnered endorsement from several Wall Street strategists, including Morgan Stanley and Barclays, who are advising clients to brace for persistent inflation pressures and elevated long-term bond yields under another Trump administration.
The surge in open interest, reflecting increased risk appetite for steepener trades totaling $15.7 million per basis point, suggests a fresh wave of short positions in longer-dated Treasuries. While specific traders remain anonymous, data points to significant futures block trades aligned with expectations of a steeper yield curve.
JPMorgan Chase & Co. data indicates parallel momentum in the cash market, with a recent survey revealing a decline in bets on a bond rally, reducing the net long position to its lowest since June. In the options market, traders are paying the highest premium in a month to hedge against potential bond futures declines.
Here’s a summary of the latest trends in the rates market:
- JPMorgan Client Sentiment: Clients reduced long positions by 5 percentage points, shifting towards neutral positions in the week ending July 1. Short bets remained unchanged, contributing to the lowest net long position since June 10.
- Options Market Dynamics: The cost to hedge risk in the long-end of the curve has risen sharply, favoring puts over calls. Notable bearish positions include bets targeting 10-year yields up to 4.55% by August 23 expiry.
- CFTC Data Insights: Leveraged accounts have extended their net short position in ultra-long bonds to levels not seen since 2022, with hedge funds adding approximately $10.8 million per basis point in risk over the week.
- Asset Manager Positions: Asset managers maintained a net long position equivalent to 93,000 10-year note futures, with bullish positions evident across intermediate durations.
The past week saw significant shifts in open interest across various strikes and spreads in the Treasury options market, reflecting ongoing adjustments and positioning ahead of potential market movements.