(Bloomberg) — The U.S. Treasury options market was abuzz Thursday as a big bearish bet emerged that Friday’s jobs report would trigger the biggest save in benchmark yields in over nine months.
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The deal targets a rise in U.S. 10-year yields to as much as 4.15% by the close of business on Friday, a jump of about 0.15 percentage points from Thursday’s closing level. That would mark the biggest one-day rise in 10-year yields since late March and a further pullback for Treasuries, which have had a rough start to the year after ending 2023 on a winning note following a furious two-year rally month.
The timing of the bearish bet comes just ahead of the December jobs report, due Friday at 8:30 a.m. New York time, with expectations growing for a strong reading. Separate data released Thursday showed hiring at U.S. businesses rose in December, while initial jobless claims fell last week, the latest signs of a resilient labor market.
“If I were a fund manager or market participant, I would think that some protection against cheap options would be desirable right now, because the market has overestimated the disinflation narrative,” said Stephen Miller, a veteran of the bond market for three decades who now works as a fund manager. investment consultant at GSFM. “So it makes sense that there would be such a bearish bet on the markets.”
The options action occurred in so-called 10-year Treasury options January First Week Friday, which are often used to hedge positions on specific risk events such as Fed policy meetings or employment reports. The buying observed on Thursday was particularly aggressive, with position construction of around 20,000 options at a premium of around $625,000.
If the 10-year yield ended the day at 4.20%, about 20 basis points higher than current market levels, the profit on the trade could reach about $10 million, according to a Bloomberg scenario analysis . The yield was around 3.99% on Friday in Asia.
Friday’s report is expected to show that U.S. employers added 175,000 jobs last month, with the so-called whisper figure calling for an increase of 185,000 positions. At the same time, Bloomberg Economics’ nowcast forecast shows a monthly increase of 283,000 nonfarm jobs, up from 199,000 in November, and a further decline in the unemployment rate to 3.6 percent, from 3. 7% a month earlier.
A strong report would add to the evidence of economic strength that has already caused traders to lower their expectations that the Federal Reserve will cut interest rates as soon as March and pare gains from the recent rally. U.S. 10-year yields — the benchmark rate for everything from mortgages to loans — have risen about 12 basis points since the start of the year, reversing a decline that had sent them down more than a point percentage in the last two months of 2023.
For Miller, U.S. wage data will be closely analyzed by traders.
« A key number we should pay attention to is hourly wages. If we don’t get 3.9%, that could be a catalyst for big moves in Treasuries, » he said.
(Updates with comments.)
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