The Big Short in Treasuries Is Showing Some Pre-Election Cracks, , on October 25, 2020 at 11:00 am

Financial News
By High West Capital Partners
On October 25, 2020
In Financial News
Tags:

(Bloomberg) — Rates traders are starting to question the big short position that’s built up in long-maturity Treasuries on the expectation of a Democratic sweep in next month’s U.S. elections.In the market for options on Treasury futures, trades emerged in the past week that wager against a leap in volatility or a major breakout in yields heading into year-end. Specifically, they benefit from 10-year rates being capped around 1%, less than 20 basis points above current levels. Some popped up Friday, after the final presidential debate.The positions lean solidly against the prevailing narrative, fueled by polling suggesting the Democrats may take both the White House and the Senate, allowing them to pass significant fiscal stimulus that jumpstarts the economy’s rebound from the pandemic. If these options traders are right, Treasuries could face a sharp reversal. Leveraged investors have never had a bigger bet on losses in bond futures. In the cash market, 10-year yields set a four-month high on Friday before retreating. But some traders see room for a contrarian take.“It’s now such a common narrative that there will be a Blue Wave and that there’ll be an enormous amount of stimulus and it will be inflationary,” said Peter Chatwell, London-based head of multi-asset strategy at Mizuho International Plc. But with a different electoral outcome, or even if polling starts to shift before the vote, “that could see some investors piling back into Treasuries.”Ten-year yields rose about 10 basis points this past week, the most since August, ending at 0.84%. Thirty-year yields increased even more, by about 11 basis points to 1.64%, driving the spread over 5-year yields to the steepest since 2016.Eye-Popping GDPIn the coming week, one highlight is a report expected to show that the economy rebounded at an eye-popping 31.8% annual pace last quarter as businesses started to reopen. A larger-than-forecast figure could pressure yields higher, opening up the risk of mortgage-related hedging that exacerbates the selloff.Granted, market participants expect that the Federal Reserve would act to avert a significant jump in yields that roils markets, no matter who emerges victorious in November.But as yields have climbed this month, there’s been a sustained increase in open interest in bond futures, an indication that fresh short positions have been fueling the move. As of Thursday, the amount of open interest in the bond futures contract was the most in two months. And in Treasury bond options, demand for hedging against a jump in yields over the next month reached the highest since March, before easing over the past few days.Against that backdrop, the past week’s options trades stood out. One, with a $20 million premium, expressed conviction that an increase in 10-year yields will stall ahead of 1%. Another wagers that traders are paying too much to hedge against higher yields.See here for further details about this week’s two big Treasury option wagersWith a contested election still a possibility, the market may have to be patient to find out which side is right. And as virus cases surge anew, the fate of the steepener trade may not even come down to the Nov. 3 vote.What to WatchThe economic calendar:Oct. 26: Chicago Fed national activity index; new home sales; Dallas Fed manufacturing activityOct. 27: Durable, capital goods orders; FHFA house price index; S&P CoreLogic home-price data; Conference Board consumer confidence; Richmond Fed manufacturing indexOct. 28: MBA mortgage applications; advance goods trade balance; wholesale inventories; retail inventoriesOct. 29: Weekly jobless claims; GDP; Bloomberg consumer comfort; pending home salesOct. 30: Personal income, spending; PCE deflator; employment cost index; MNI Chicago PMI; University of Michigan sentimentThe Fed calendar:Oct. 28: Dallas Fed’s Robert Kaplan moderates panel with former Bank of England Governor Mark CarneyThe auction calendar:Oct. 26: 13-, 26-week billsOct. 27: 2-year notesOct. 28: 2-year floating-rate notes; 5-year notesOct. 29: 4-, 8-week bills; 7-year notesFor more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.,

The Big Short in Treasuries Is Showing Some Pre-Election Cracks(Bloomberg) — Rates traders are starting to question the big short position that’s built up in long-maturity Treasuries on the expectation of a Democratic sweep in next month’s U.S. elections.In the market for options on Treasury futures, trades emerged in the past week that wager against a leap in volatility or a major breakout in yields heading into year-end. Specifically, they benefit from 10-year rates being capped around 1%, less than 20 basis points above current levels. Some popped up Friday, after the final presidential debate.The positions lean solidly against the prevailing narrative, fueled by polling suggesting the Democrats may take both the White House and the Senate, allowing them to pass significant fiscal stimulus that jumpstarts the economy’s rebound from the pandemic. If these options traders are right, Treasuries could face a sharp reversal. Leveraged investors have never had a bigger bet on losses in bond futures. In the cash market, 10-year yields set a four-month high on Friday before retreating. But some traders see room for a contrarian take.“It’s now such a common narrative that there will be a Blue Wave and that there’ll be an enormous amount of stimulus and it will be inflationary,” said Peter Chatwell, London-based head of multi-asset strategy at Mizuho International Plc. But with a different electoral outcome, or even if polling starts to shift before the vote, “that could see some investors piling back into Treasuries.”Ten-year yields rose about 10 basis points this past week, the most since August, ending at 0.84%. Thirty-year yields increased even more, by about 11 basis points to 1.64%, driving the spread over 5-year yields to the steepest since 2016.Eye-Popping GDPIn the coming week, one highlight is a report expected to show that the economy rebounded at an eye-popping 31.8% annual pace last quarter as businesses started to reopen. A larger-than-forecast figure could pressure yields higher, opening up the risk of mortgage-related hedging that exacerbates the selloff.Granted, market participants expect that the Federal Reserve would act to avert a significant jump in yields that roils markets, no matter who emerges victorious in November.But as yields have climbed this month, there’s been a sustained increase in open interest in bond futures, an indication that fresh short positions have been fueling the move. As of Thursday, the amount of open interest in the bond futures contract was the most in two months. And in Treasury bond options, demand for hedging against a jump in yields over the next month reached the highest since March, before easing over the past few days.Against that backdrop, the past week’s options trades stood out. One, with a $20 million premium, expressed conviction that an increase in 10-year yields will stall ahead of 1%. Another wagers that traders are paying too much to hedge against higher yields.See here for further details about this week’s two big Treasury option wagersWith a contested election still a possibility, the market may have to be patient to find out which side is right. And as virus cases surge anew, the fate of the steepener trade may not even come down to the Nov. 3 vote.What to WatchThe economic calendar:Oct. 26: Chicago Fed national activity index; new home sales; Dallas Fed manufacturing activityOct. 27: Durable, capital goods orders; FHFA house price index; S&P CoreLogic home-price data; Conference Board consumer confidence; Richmond Fed manufacturing indexOct. 28: MBA mortgage applications; advance goods trade balance; wholesale inventories; retail inventoriesOct. 29: Weekly jobless claims; GDP; Bloomberg consumer comfort; pending home salesOct. 30: Personal income, spending; PCE deflator; employment cost index; MNI Chicago PMI; University of Michigan sentimentThe Fed calendar:Oct. 28: Dallas Fed’s Robert Kaplan moderates panel with former Bank of England Governor Mark CarneyThe auction calendar:Oct. 26: 13-, 26-week billsOct. 27: 2-year notesOct. 28: 2-year floating-rate notes; 5-year notesOct. 29: 4-, 8-week bills; 7-year notesFor more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.

,

Instant Quote

Enter the Stock Symbol.

Select the Exchange.

Select the Type of Security.

Please enter your First Name.

Please enter your Last Name.

Please enter your phone number.

Please enter your Email Address.

Please enter or select the Total Number of Shares you own.

Please enter or select the Desired Loan Amount you are seeking.

Please select the Loan Purpose.

Please select if you are an Officer/Director.

High West Capital Partners, LLC may only offer certain information to persons who are “Accredited Investors” and/or “Qualified Clients” as those terms are defined under applicable Federal Securities Laws. In order to be an “Accredited Investor” and/or a “Qualified Client”, you must meet the criteria identified in ONE OR MORE of the following categories/paragraphs numbered 1-20 below.

High West Capital Partners, LLC cannot provide you with any information regarding its Loan Programs or Investment Products unless you meet one or more of the following criteria. Furthermore, Foreign nationals who may be exempt from qualifying as a U.S. Accredited Investor are still required to meet the established criteria, in accordance with High West Capital Partners, LLC’s internal lending policies. High West Capital Partners, LLC will not provide information or lend to any individual and/or entity that does not meet one or more of the following criteria:

1) Individual with Net Worth in excess of $1.0 million. A natural person (not an entity) whose net worth, or joint net worth with his or her spouse, at the time of purchase exceeds $1,000,000 USD. (In calculating net worth, you may include your equity in personal property and real estate, including your principal residence, cash, short-term investments, stock and securities. Your inclusion of equity in personal property and real estate should be based on the fair market value of such property less debt secured by such property.)

2) Individual with $200,000 individual Annual Income. A natural person (not an entity) who had individual income of more than $200,000 in each of the preceding two calendar years, and has a reasonable expectation of reaching the same income level in the current year.

3) Individual with $300,000 Joint Annual Income. A natural person (not an entity) who had joint income with his or her spouse in excess of $300,000 in each of the preceding two calendar years, and has a reasonable expectation of reaching the same income level in the current year.

4) Corporations or Partnerships. A corporation, partnership, or similar entity that has in excess of $5 million of assets and was not formed for the specific purpose of acquiring an interest in the Corporation or Partnership.

5) Revocable Trust. A trust that is revocable by its grantors and each of whose grantors is an Accredited Investor as defined in one or more of the other categories/paragraphs numbered herein.

6) Irrevocable Trust. A trust (other than an ERISA plan) that (a)is not revocable by its grantors, (b) has in excess of $5 million of assets, (c) was not formed for the specific purpose of acquiring an interest, and (d) is directed by a person who has such knowledge and experience in financial and business matters that such person is capable of evaluating the merits and risks of an investment in the Trust.

7) IRA or Similar Benefit Plan. An IRA, Keogh or similar benefit plan that covers only a single natural person who is an Accredited Investor, as defined in one or more of the other categories/paragraphs numbered herein.

8) Participant-Directed Employee Benefit Plan Account. A participant-directed employee benefit plan investing at the direction of, and for the account of, a participant who is an Accredited Investor, as that term is defined in one or more of the other categories/paragraphs numbered herein.

9) Other ERISA Plan. An employee benefit plan within the meaning of Title I of the ERISA Act other than a participant-directed plan with total assets in excess of $5 million or for which investment decisions (including the decision to purchase an interest) are made by a bank, registered investment adviser, savings and loan association, or insurance company.

10) Government Benefit Plan. A plan established and maintained by a state, municipality, or any agency of a state or municipality, for the benefit of its employees, with total assets in excess of $5 million.

11) Non-Profit Entity. An organization described in Section 501(c)(3) of the Internal Revenue Code, as amended, with total assets in excess of $5 million (including endowment, annuity and life income funds), as shown by the organization’s most recent audited financial statements.

12) A bank, as defined in Section 3(a)(2) of the Securities Act (whether acting for its own account or in a fiduciary capacity).

13) A savings and loan association or similar institution, as defined in Section 3(a)(5)(A) of the Securities Act (whether acting for its own account or in a fiduciary capacity).

14) A broker-dealer registered under the Exchange Act.

15) An insurance company, as defined in Section 2(13) of the Securities Act.

16) A “business development company,” as defined in Section 2(a)(48) of the Investment Company Act.

17) A small business investment company licensed under Section 301 (c) or (d) of the Small Business Investment Act of 1958.

18) A “private business development company” as defined in Section 202(a)(22) of the Advisers Act.

19) Executive Officer or Director. A natural person who is an executive officer, director or general partner of the Partnership or the General Partner, and is an Accredited Investor as that term is defined in one or more of the categories/paragraphs numbered herein.

20) Entity Owned Entirely By Accredited Investors. A corporation, partnership, private investment company or similar entity each of whose equity owners is a natural person who is an Accredited Investor, as that term is defined in one or more of the categories/paragraphs numbered herein.

Please read the notice above and check the box below to continue.

Singapore

+65 3105 1295

Taiwan

Coming Soon!

Hong Kong

R91, 3rd Floor,
Eton Tower, 8 Hysan Ave.
Causeway Bay, Hong Kong
+852 3002 4462

Follow Us

Market Coverage