The US Treasury market is bracing for potential turbulence as Donald Trump’s inauguration approaches. Options trading indicates a possible surge in 10-year Treasury yields to 5%, a level unseen since October 2023, adding to the existing market slump. This anticipated rise reflects growing concerns among bond traders.
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Speculation that Trump’s policies will accelerate inflation and widen deficits, coupled with a robust US economy, has driven 10-year Treasury yields up roughly 50 basis points in the past month, approaching 4.7%. This week’s heavy corporate bond issuance and $119 billion in US debt auctions, with expectations of further government borrowing, have fueled the upward pressure.
“Uncertainty surrounding fiscal policy is keeping buyers away from the market,” says Gargi Chaudhuri, chief investment and portfolio strategist for the Americas at BlackRock Inc. “More clarity is expected as the inauguration unfolds, particularly regarding future Treasury issuance.”
Positive economic data, including recent reports on job openings and the service sector, have further bolstered yields by pushing expectations for Federal Reserve interest-rate cuts into the latter half of 2025.
Amidst this backdrop, investors are anticipating a significant yield increase. CME options data on Tuesday revealed a new trade targeting 5% 10-year Treasury yields by February’s end. This could be just the beginning: ING Groep NV’s head of global debt and rates strategy, Padhraic Garvey, projects 10-year US Treasury yields around 5.5% by late 2025, while T. Rowe Price’s Arif Husain suggests 6% is possible.
The recent surge in Treasury yields seems to coincide with a buildup of short positions in the futures market. Open interest, a measure of market activity, has increased for five consecutive sessions in the ultra 10-year note contract, which tracks the generic 10-year cash note. Similarly, open interest in the long-bond contract, linked to the 2040 cash bond, has risen in eight of the last nine sessions. Rising open interest during a sell-off generally signals new bearish bets.
However, despite the steady climb in yields, some investors perceive opportunities as the new trading year commences. JPMorgan Chase & Co.’s latest client survey indicates a rise in long positions to their highest level in over a year, although short positions also grew last week.
Key Positioning Indicators Across the Rates Market
Here’s a summary of recent market positioning:
JPMorgan Treasury Client Survey
Long positions increased by 8 percentage points to their highest since December 4, 2023, while short positions rose by 6 percentage points in the week ending January 6.
Treasury Options Premium Favoring Puts
The cost of hedging against a sell-off in long-dated Treasuries has increased, with a pronounced skew towards puts, reaching a 15-day high. This aligns with the steady yield increase over the past month, pushing the 10-year Treasury to its least expensive level since early May. An $11 million premium wager targeting a 5% 10-year yield highlights the strong put demand in Treasury options this week. Demand for weekly options, also favoring a larger market sell-off, has been robust.
Most Active SOFR Options
Significant new risk was added at the 96.4375 strike, driven by activities like buying the SFRU5 96.25/96.4375 observed on Friday. The rising open interest throughout the week predominantly reflects bullish structures, with new positioning across various call strikes in March, June, and September 2025 tenors. Following Tuesday’s JOLTS and ISM services data, Fed-dated OIS pricing for the first full 25bp easing shifted from June to July 2025.
CFTC Futures Positioning
Hedge funds increased net short positions by roughly 124,000 10-year note futures equivalents towards year-end, while asset managers added approximately 72,000 10-year note futures equivalents to their net long positions. CFTC data reveals that the most substantial new short risk for hedge funds was in ultra 10-year note futures, where bearish positioning expanded by about $5.9m/DV01.
In conclusion, the US Treasury market faces potential volatility as Trump’s inauguration nears. While concerns over rising inflation, deficits, and increased government borrowing contribute to the upward pressure on yields, some investors view the current environment as an opportunity. Market participants are closely monitoring economic data and policy developments for further guidance.
