Traders Ramp Up Bets on a Treasury Selloff After Trump’s Win

Traders are loading up on bets for further losses in the Treasury market in anticipation that Donald Trump’s pledged policies will rekindle inflation and keep US interest rates high.

Open interest, an indication of futures traders’ positioning in the bond market, rose for a fourth-consecutive session in the two-year note contract, data released on Tuesday show. The rise is a signal that traders are building up bearish positions after the election — and in advance of a reading of October inflation data to be released on Wednesday.

The expansion of short bets comes amid a selloff in US government debt that sent yields higher by more than 10 basis points across the curve on Tuesday. A gauge of Treasury returns is only 1.4% away from wiping out its year-to-date gains.

“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.

In two-year note futures, open interest has climbed by approximately 132,000 contracts over the past four sessions — equivalent to roughly $8.4 million per basis point in risk added into the front-end selloff. Traders have so far been targeting their short bets in shorter-maturity debt, such as the two- and five-year notes contracts.

For bearish traders, it’s an easy bet to get behind. Two- and five-year yields on Tuesday returned to their highest levels since July as investors assess Trump’s vowed policies, like tax cuts and tariffs, that could fuel price pressures. 

Inflation has already charged back onto the field for bond investors and Federal Reserve watchers as they assess the path ahead for interest rates in the US. Traders are pricing in just over a 50% chance that officials deliver another quarter-point cut in December.

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,” he said.

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.

Wednesday’s 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.

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.

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.

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. 

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.

This article was generated from an automated news agency feed without modifications to text.