Treasury Market Sees Large Options Trade Betting 10-Year Yield Will Break Above 5%

Odaily News: A large options trade appeared in the U.S. Treasury market today, betting that the selloff momentum in U.S. government bonds will push the 10-year yield above 5%. Rising oil prices could further stoke already elevated inflation, and this options trade is the latest sign that investors are stepping up hedging against bond market risk.

The selloff has pushed the 10-year yield once again close to its 2023 peak of slightly above 5%. The 30-year U.S. Treasury yield rose to 5.35% on Thursday, the highest level since 2007. The options trade paid a premium of about $14 million, a sizable amount in the derivatives market.

Earlier, traders said a wave of behind-the-scenes hedging activity had already emerged in the market, adding fuel to the selloff. If the decline continues, investors may further buy bearish options to protect their portfolios from losses, while also potentially increasing so-called convexity hedging. If the 10-year U.S. Treasury yield rises to about 5.1%, the trade will reach its breakeven point; if the yield rises to 5.2%, the gain will increase to about $15 million. The last time the 10-year yield reached this level was in 2007.