Bond Traders Brace for Volatility Ahead of Trump’s Inauguration

Bond traders, navigating a challenging Treasury market downturn, are preparing for heightened volatility as Donald Trump’s inauguration approaches. Data from options markets signals a possible surge in U.S. 10-year yields to 5%, a level not seen since October 2023.

Rising Inflation and Deficits Driving Yields Higher

Expectations of accelerated inflation and expanded deficits, driven by Trump’s policies, have pushed 10-year Treasury yields nearly half a point higher over the last month to around 4.7%. This surge is further amplified by a rush of corporate bond issuance and a $119 billion U.S. debt auction this week, with additional borrowing anticipated.

Uncertainty Over Fiscal Policy Raises Concerns

“We need clarity on fiscal policy, and we’re likely to get more insight as the inauguration unfolds,” said Gargi Chaudhuri, BlackRock’s Chief Investment Strategist for the Americas. “Uncertainty around increased Treasury issuance is deterring buyers.”

Optimistic Economic Reports Delay Fed Rate Cuts

Positive economic data, including job openings and service sector reports, has delayed expectations for Federal Reserve rate cuts. This postponement has complicated market outlooks, causing uncertainty among investors. Analysts predict that rate cuts may occur later in the year. Consequently, market forecasts are becoming more intricate, with cautious investor sentiment.

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Investors Bet on Higher Yields by February

In response to these trends, investors are positioning for significantly higher yields. CME options data from Tuesday indicated a new trade targeting 5% 10-year Treasury yields by the end of February. Padhraic Garvey of ING Groep anticipates a potential rise to 5.5% by late 2025, while Arif Husain from T. Rowe Price sees the possibility of a 6% yield.

Short Positions Rise Amid Rising Yields

The surge in Treasury yields is also accompanied by increasing short positions in the futures market. Open interest in the ultra 10-year note contract has climbed for five consecutive sessions, signaling growing bearish sentiment.

Investor Sentiment Shifts Towards Both Long and Short Positions

Despite the upward trend in yields, some investors are seizing opportunities. JPMorgan Chase’s client survey revealed a significant increase in long positions, though short positions also saw growth. By January 6, short positions rose by 6 percentage points, while long positions surged by 8 percentage points, reaching their highest levels since December 2023.

Growing Hedging Activity Reflects Market Selloff Concerns

The cost to hedge against a selloff in the long end of the Treasury curve has risen, with options reflecting a market lean towards puts. An $11 million wager on a 5% 10-year yield stands out, and strong demand for weekly options also suggests a potential market selloff.

Increased Risk in Futures Market and Hedge Fund Positions

Recent trading flows show increased risk, particularly in the 96.4375 strike, with bullish positioning seen in multiple call strikes for March, June, and September 2025. Hedge funds have increased net short positions by approximately 124,000 10-year note futures equivalents, while asset managers have boosted net long positions by about 72,000 contracts. Hedge funds have extended their bearish positions in ultra 10-year note futures by around $5.9 million/DV01, according to CFTC data.

Bond traders face heightened uncertainty with a looming Treasury market downturn and potential surge in U.S. 10-year yields. The approach of Trump’s inauguration adds further volatility, influencing market expectations and strategies, according to wsj deals.