Traders Brace for Treasury 10-Year Yield at 5% as Mood Sours

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Traders Brace for Treasury 10-Year Yield at 5% as Mood Sours.

treasuries & bonds :: 2025-05-21 :: source - bloomberg

By Edward Bolingbroke

(Bloomberg) — Traders are piling into bets that long-term Treasury yields will surge on concerns over the US government’s swelling debt and deficits, a situation made more precarious by President Donald Trump’s tax-cut bill.

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The murky economic outlook is fueling hedging activity in Treasury options, with investors targeting higher rates on longer-dated bonds by the end of the year. The latest spurt of downside wagers echoes sentiment on Wall Street where strategists from Goldman Sachs Group Inc. to JPMorgan Chase & Co. are lifting their forecasts for yields.

Plays favoring the 10-year yield (^TNX) testing 5% are among some of the bigger positions. Monday’s CME open interest data confirmed a large wager on 10-year yields rising toward 5% in the coming weeks, indicating new risk for a heavy premium of $11 million. Over the past week, a trend of options flows hedging a move higher in yields has emerged, reflected in the so-called options skew, which shows rising premiums to reflect a bond market selloff.

“Given trade and monetary policy uncertainty amid a structural shift in the demand landscape, the risks are skewed toward bearish steepening over the near term,” JPMorgan strategists including Jay Barry and Jason Hunter wrote in a note.

On Monday, the 30-year yield (^TYX) briefly eclipsed 5% to reach its highest level since November 2023 before paring the move, during a selloff sparked by Moody’s Ratings cutting the US credit score to Aa1 from Aaa. The downgrade drove yields of all maturities higher in early trading Monday before wiping out increases.

“The bond market is going to have the final say on what happens fiscally,” Garda Capital Partners’ Tim Magnusson said in an interview at the firm’s New York office. Lawmakers “are going to get tested more — 5% is not the final line in the sand.”

Premiums to protect against bigger losses on the long-end of the Treasury curve are now at their highest level since April, when markets were shaken by the potential economic fallout from Trump’s aggressive trade policies. The current move in options skew means that traders are driving up the price of puts that hedge against the risk of a yield spike, relative to call options that would profit from the opposite.

Tuesday’s JPMorgan Treasury client survey also highlights the expectation for higher bond yields, with outright short positions climbing to the highest since Feb. 10. With investor positioning more neutral than in early April however, the JPMorgan strategists expect “significantly smaller moves than experienced last month.”

Here’s a rundown of the latest positioning indicators across the rates market:

JPMorgan Treasury Client Survey

In the week up to May 19, investor outright short and long positions both rose by 2 percentage points, with neutrals dropping 4 percentage points. The shift took the outright short positions to the highest level since Feb. 10.

Most Active SOFR Options

Across SOFR options out to the Dec25 tenor, the 95.75 strike was again a popular level amid a flurry of new positions in Sep25 puts. There was also a large amount of the 95.625 strike traded over the past week via heavy demand for the SFRZ5 96.00/95.625 put spread bought versus selling 0QZ5 96.25/95.875 put spread. There was also a bump in open interest in the 97.25 strike with recent flows including outright buying in the Jun25 calls and SFRM5 97.25/97.50 call strip buying.

SOFR Options Heatmap

The 95.75 strike remains the most populated across Jun25, Sep25 and Dec25 options, largely due to a heavy amount of demand for the level via various Sep25 put structures. The 95.625 strike also remains well populated due to large positioning around the Jun25 puts via the SFRM5 95.75/95.625 put spread, which has recently traded. The top three most-populated strikes still contain a large amount of June 2025 put exposure.

Treasury Options Skew

Traders are paying an increasing amount of premium to hedge a selloff in the long-end of the curve, matching the move in US 30-year yields through the 5% level over Monday’s session and the recent steepening of the Treasuries curve. The skew toward puts in the long-bond contract is now the most in about a month. Recent flows have also targeted downside protection, with a number of plays targeting 10-year yields to rise up to and through 5% in the coming weeks. On Monday, around $11 million premium was spent on a position targeting a 4.95% 10-year yield, while there was also a large seller of rates volatility.

CFTC Futures Positioning

There were large amounts of de-leveraging from both asset managers liquidating long positions and hedge funds covering short positions in the week up to May 13, CFTC data shows.

Total amount of net long duration unwind from asset managers was roughly 217,000 10-year note futures equivalents while net duration short covering from hedge funds amounted to about 139,000 10-year note futures equivalents. The amount of net long unwind from asset managers was the largest since November.

“The traditional role of U.S. government bonds in many global portfolios will become more diminished,” Henry McVey, KKR & Co.’s head of global macro and asset allocation, wrote in a research note. “The reality is that the US government is burdened with a large fiscal deficit and high leverage.”

—With assistance from Liz Capo McCormick, Ye Xie and Masaki Kondo.