Persistent tariff concerns overshadowed June's U.S. CPI data, prompting investors to dial back expectations for a September Fed rate cut. This triggered heavy selling of long-dated Treasuries, with the 30-year yield piercing the 5% threshold on Tuesday – its highest point since early June and a return to this year's peak range.
Options markets flashed warning signals as traders placed aggressive bearish bets targeting a 5.3% yield for 30-year Treasuries within approximately five weeks. Such levels haven't been seen since 2007, with premiums for these contracts swelling to $10 million. JPMorgan's client survey mirrored this caution, revealing net long positions shrinking to six-week lows.
The Commodity Futures Trading Commission reported surging demand for yield-protection strategies, pushing hedging costs to one-month highs. Market activity showed sophisticated positioning through skewed options structures: Implied volatility for low-strike puts dramatically outpaced calls on 30-year bonds throughout the week, signaling entrenched downside expectations.
Municipal bonds joined the rout as Treasury weakness spilled over. Benchmark 10-year muni yields jumped 8 basis points to 3.25%, amplifying pressure across the curve. CreditSights strategist Patrick Luby observed divergent demand dynamics: "The long end lacks meaningful incremental buying despite attractive yields, while short-dated paper maintains solid support – creating asymmetric curve pressure."
This bond market stress reflects deepening anxiety over tariff-induced inflation persistence. Investors now position for prolonged higher rates, with options markets anticipating further long-bond deterioration as hedge volumes accelerate.
Comments