(Bloomberg) — Bond traders who have been mired in a Treasury market slump are bracing for more of the same as Donald Trump’s inauguration approaches, with options indicating the potential for a spike in US 10-year yields to 5% — a level not seen October 2023.
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Speculation that Trump’s policies will spur both quicker inflation and higher deficits as the US economy chugs along has sent yields on 10-year Treasury notes soaring roughly half a point over the past month to near 4.7%. A rush of corporate-bond issuance and $119 billion of US debt auctions this week — with more government borrowing expected in the weeks ahead — has added to upside pressure.
“We need a little bit of certainty on fiscal policy and we will hear more about that as the inauguration takes place,” Gargi Chaudhuri, chief investment and portfolio strategist for the Americas at BlackRock Inc. “This unknown of more Treasury issuance coming to the market will keep the buyers away.”
Meanwhile, upbeat economic readings such as Tuesday’s data on job openings and the service sector have pushed out expectations for further Federal Reserve interest-rate cuts into the second half of the year.
Against this backdrop, investors are positioning for sharply higher yields. Options data Tuesday from the CME indicated a fresh trade targeting 10-year Treasury yields at 5% by the end of February. That may be just the start: Padhraic Garvey, head of global debt and rates strategy at ING Groep NV, sees 10-year US Treasury yields trading around 5.5% toward the end of 2025, while T. Rowe Price’s Arif Husain said 6% is within the range of possibility.
The recent surge in Treasury yields appears to have been accompanied by the buildup of short positions in the futures market. Open interest, a gauge of activity in the market, has risen in each of the past five sessions in the so-called ultra 10-year note contract, which tracks the generic 10-year cash note. Further out, open interest has risen in eight of the past nine sessions in the long-bond contract, which matches up against the 2040 cash bond. Rising open interest into a selloff broadly indicates new bearish wagers.
To be sure, even as yields have marched steadily higher, some investors see opportunity as the new trading year gets underway. JPMorgan Chase & Co.’s latest client survey showed long positions increasing to the biggest in more than a year, though short positions also grew over the past week.
