The possible return of Donald Trump to the White House is motivating bets on the bond market Treasury’s expectation of an increase in long-term rates.
Investors have been buying shorter-dated bonds and selling longer-dated ones after Trump emerged the clear winner over President Joe Biden in last week’s first presidential debate. It’s a bet — known as “thesteepener trade”—which has been gaining popularity ever since.
Open interest, or the amount of risk traders hold, rose sharply on Friday and Monday as the gap between two- and 10-year rates widened. The result was a steepening of the curve by about 13 basis points, the biggest such two-day move since October. That move eased slightly as the week progressed, with shorter yields rising on Wednesday.
“It is still too early to fully assess the outcome of the election, but it is probably not too early to be prepared.“said Subadra Rajappa, head of U.S. rates strategy at Société Générale SA.The recent move is a bearish steepening and appears to be the market assigning higher probabilities to a Trump victory.”
The move has been trumpeted by a chorus of Wall Street strategists in recent days, with Morgan Stanley and Barclays urging clients to prepare for sticky inflation and higher long-term bond rates under another Trump administration.
As the bet became more popular in the market, open interest rose by a total of $15.7 million per basis point of risk, a metric that indicates traders’ appetite for new trades. steepenerIt also suggests that the recent decline in longer-dated Treasuries was driven by new short positions.
Trading in many of these notes is anonymous, making it difficult to identify the companies behind them. Still, the data showed a large block trade in futures steepener on Friday which appears to be in line with bets on a steeper yield curve.
The cash market is seeing a similar boost, according to data from JPMorgan Chase & Co. The bank’s latest client survey showed a 5 percentage point drop in the number of bets on a bond rally, bringing the net long position to the smallest since June 10.
In the options market, traders are paying the most expensive premium in a month to protect against a sell-off in the bond futures contract.
Source: Gestion
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