NEW YORK: Bond traders are preparing for Treasury yields to drop further even as the 30-year reached its lowest level in six months.
The cost of protection against a bigger decline in yields across the curve is rapidly rising, according to pricing of options wagers.
With the US government shutdown on its way to becoming the second longest on record, renewed concerns over the credit market and heightened US-China trade tensions, traders are piling into quality, risk-off assets. The advance in the Treasury market is pushing yields across the curve lower.
Over the past week, the cost of Treasury call options rose sharply relative to puts. That skew in favour of calls remained close to the most extreme levels last seen in early April when President Donald Trump announced global tariffs.
“In terms of positioning the tactical setup is clear – long everything with the market rapidly chasing the richening moves” in US bonds, Citi strategist David Bieber wrote in a Tuesday note.
Increased hedging by traders who sold protection against a further decline in yields can also trigger more buying of Treasuries. — Bloomberg
