Bond traders are injecting millions of dollars into options, wagering that 10-year Treasury notes are poised for a rally that will drive yields to five-month lows. Bullish positioning increased on Tuesday, ahead of a possible US government shutdown that could impact the economy. This situation could solidify expectations that the Federal Reserve will cut interest rates again at the end of October.
One notable bet involved a premium of $US35 million, targeting a decline in 10-year yields to roughly 4.05 per cent before most of the options expire on November 21. The current yield is around 4.15 per cent. This activity follows a surge of bullish trades observed in 10-year options last week, including one position with approximately a $50 million premium anticipating a drop to as low as 3.95 per cent during the same period.
Reaching 3.95 per cent would bring the rate to its lowest levels since April. At that time, tariff concerns fuelled market volatility. Market analysts are observing how investors are responding to the possibility of a government shutdown.
“Investors appear to be interpreting any potential shutdown uncertainty as support for a lower fed funds rate, and we’re certainly on-board with this read,” wrote Ian Lyngen and Vail Hartman, rates strategists at BMO Capital Markets, in a note on Tuesday.
