A series of large-scale US Treasury futures sell-offs have intensified the decline in this $31 trillion government bond market. As investors worry about the resurgence of inflation, markets are beginning to price in expectations of higher interest rates.
Long-term US Treasury yields reached their highest levels since 2007 on Tuesday, with substantial block sales of 5-year and 10-year Treasury futures further exacerbating the market downturn. According to compiled data, these futures transactions occurred within a frenetic hour of early US trading, with a trading volume equivalent to $15 billion in current 10-year Treasury notes.
"The US Treasury market experienced a classic capitulation trading day," said Alan Taylor, founding partner at Archr LLP, noting that the selling wave was fueled by "multiple large sellers."
This selling wave once again indicates that the surge in energy prices triggered by war has heightened inflation concerns, prompting markets to bet that central banks, including the Federal Reserve, will need to raise interest rates. Futures pricing on Tuesday showed that the market sees an 85% probability of a rate hike by year-end, whereas no rate hike expectations were reflected as of May 1.
Persistently rising yields could weigh on the currently resilient US economy and increase borrowing costs for American homebuyers and businesses.
**Block Trades**
The first block trade hit the market at 9:38 AM New York time on Tuesday, with sell-offs continuing until around 10:40 AM. During this approximately one-hour period, 136,500 contracts of 10-year Treasury futures and 83,000 contracts of 5-year Treasury futures were sold via block trades. The trading volume of 10-year Treasury futures was about 80% higher than its 20-day average.
These transactions collectively represent an exposure of approximately $12 million per basis point, distributed across 10 block trades. Since these contracts are traded anonymously, it is difficult to identify the participating firms and the ultimate beneficiaries.
Although Tuesday's trading activity likely stemmed from traders unwinding previous bullish positions, market positioning over the past few trading days has clearly shifted toward bearishness. Last week's open interest data showed that as yields began to climb, traders increased their exposure to 10-year US Treasury futures, with short positions also on the rise.
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