Bets for higher US yields wane as options show Trump fatigue

[LONDON] Bets on a rise in US Treasury yields are waning in option markets, on uncertainty over President Donald Trump's fiscal policies, Federal Reserve rate rises and the French election.

The implied volatility of a rise in 10-year yields in three months compared to a fall has dropped near zero, after a rally on Mr Trump's election. Changes in these short-dated skew options can predict a change in the underlying bond rates.

Treasury yields have stalled this year as Mr Trump is yet to lay out the details of his tax and infrastructure spending plans and as traders await the trajectory of the Federal Reserve's rate rises. Yields surged in November as Mr Trump's comments on investment led to expectations for higher inflation.

This fall in short-dated skews may indicate increased demand to protect short positions on Treasuries. The skew could move higher ahead of a joint session of the US Congress on Feb 28, where Mr Trump may announce the details of tax reforms. The risk of it flattening further could come from increased concerns over the potential for euro-skeptic Marine Le Pen to win France's presidential election, which would spur a flight to quality.

The loss of market direction is shown by US yields being trapped in a triangle chart pattern, currently between 2.34 per cent and 2.5 per cent. Any yield breakout to the upside could seek the Dec 15 high of 2.64 per cent.

Tanvir Sandhu is an interest-rate and derivatives strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.


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