Key insights
- Bearish bets on US Treasuries are increasing as inflation persists, driven by rising oil prices and the latest CPI data. The market is pricing in a higher probability of a Fed rate hike by mid-2025, with interest-rate swaps reflecting these expectations. This shift towards higher yields could pressure equity valuations, particularly for growth stocks.
(Bloomberg) -- Traders have renewed bearish bets on US Treasuries, lifting expectations that the Federal Reserve will raise interest rates as oil prices and inflation push higher.
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The hawkish shift has rippled across maturities. At the short end of the curve, interest-rate swaps have resumed pricing a quarter-point rate hike by the middle of next year. Long-dated Treasuries are also under pressure as traders are betting on yields to sustain a move above 5%.
Meanwhile, a selloff in Treasury futures Monday sent five-year yields further above 4% and sparked a buildup in short positions, including one of the largest new positions in 10-year notes in over a month. Yields were little changed on Wednesday.
The ramp-up in rate hike odds has gained momentum this week after consumer price data showed US inflation accelerated in April due to rising gasoline and grocery costs.
“There’s a decent short base that has been building in the market,” said Kelsey Berro, fixed-income portfolio manager at JPMorgan Asset Management. “The market has been very efficient in repricing to a reality of higher inflation for longer as a function of the increase in energy prices.”
In the options market tied to the Secured Overnight Financing Rate, which closely tracks Fed policy expectations, traders are looking to hedge against more rate hikes being priced into SOFR futures over the coming weeks.
During Monday’s session demand emerged for put options targeting a couple of rate hikes to be priced in by the end of next year. Interest-rate swaps currently show around 85% of a quarter-point hike by the April policy meeting, with traders adding to the bets after the latest CPI data.
“Bearish sentiment is rebuilding into the rise in yields with short risk being added to the front end in SOFR and in the belly of the curves,” Citigroup Inc. strategist David Bieber said.
A number of Fed officials have recently pushed back on the presumption that the Fed’s next policy move will be a cut. After Tuesday’s data, Federal Reserve Bank of Chicago President Austan Goolsbee said inflation readings show pervasive price pressures in the US economy and may even indicate an overheating.
“What the market is pricing is a resilient economy and a Fed that is able to stay on hold for a significant period of time,” JPMorgan’s Berro said.
In the cash market, a survey of JPMorgan clients released Tuesday also showed bearish sentiment on the rise, as investor outright short positions rose to the most in 13 weeks.
Here’s a rundown of the latest positioning indicators across the rates market:
JPMorgan Treasury Client Survey
In the week up to May 11 investor outright short positions jumped 6 percentage points and onto the most since Feb. 2. The shift came out of neutrals, which dropped 6 percentage points with outright long positions unchanged over the week.
SOFR Options Positioning
Across SOFR Jun26, Sep26 and Dec26 options, there has been a large jump of open interest in the 96.50 strike largely due to demand for Sep26 calls. Flows over the past week have included buyer of SFRU6 96.50/96.5625 call spreads and SFRU6 96.125/96.25/96.375/96.50 call condors for new risk. The gains in 96.0625 strikes is largely due to Dec26 puts, where recent flows have included buyer of SFRZ6 96.0625/96.00/95.9375/95.875 put condors.
The 96.50 strike remains the biggest populated position across Jun26, Sep26 and Dec26 options, followed by the 96.3125 strike where open interest has grown over the past week. Flows have included buyer of SFRU6 96.3125/96.4375/96.5625 call flies. There remains a large amount of open interest in the 96.75 strike, where a large amount of risk can be seen in Jun26 and Sep26 calls.
Treasury Options Skew
The premium paid to hedge options continues to favor puts, as traders pay up for a move higher in yields across the long-end of the curve, although the skew has been relatively steady over the past week. Recent flows in Treasury options have included large buyer of Week 5 10-year calls, targeting 4.25% 10-year yields by the end of the month.
--With assistance from Ye Xie.
(Updates prices.)
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