<!-- HTML_TAG_START -->FILE PHOTO: Traders work on the floor of the NYSE in New York<!-- HTML_TAG_END --> <span class="caption-separator yf-8xybrv" data-svelte-h="svelte-nxhdlu">·</span> <span>Reuters</span>
By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) – Investors in the futures options market are betting the benchmark U.S. 10-year Treasury yield is headed higher to 5% in the near term, reflecting worries that the incoming Trump administration’s policies will increase an already bloated fiscal deficit and revive inflation.
Traders are watching that key 5% level in the 10-year note, which, if hit, could be bad news for U.S. stocks, much like it was in October 2023 when the 10-year yield climbed to 5.02%. That coincided with the benchmark S&P 500 index dropping to a five-month low.
Higher interest rates in general also mean increased borrowing costs for consumers and businesses.
In swaptions, or options on interest rate swaps, the market is also pointing to higher 10-year rates, although not as straightforward as those on Treasury futures.
As President-elect Donald Trump nears his Jan. 20 inauguration, market participants have become increasingly anxious about his pledge to impose widespread tariffs on imports, a move widely viewed as inflationary, as they wager that Treasuries will sell off, pushing yields higher.
“It’s all about the unknowns and the policy fog,” said Chip Hughey, managing director of fixed income at Truist Advisory Services in Richmond, Virginia. “That uncertainty revolves around the scope of tariffs and what that may mean ultimately for inflation.”
Tax cuts are also one of Trump’s campaign promises, which should benefit consumers and businesses overall. But if tax cuts are not financed by spending reductions, they will likely expand the federal deficit. That means more Treasury debt issuance flooding the market to manage the spending gap, pushing interest rates higher.
Analysts said open interest, the amount of outstanding positions held by traders, is building in the March contract for 10-year Treasury futures put options, with strikes in the 105 to 106 price levels, according to traders, citing their data on Thursday. Those strikes target the 10-year yield hitting between 4.75% and 5.00%.
Treasury put options are typically used to position for a decline in bond prices that leads to higher implied yields.
The U.S. 10-year yield was little changed on Thursday at 4.689%, after hitting a roughly eight-month peak of 4.73% on Wednesday.
BEARISH SENTIMENT
More puts have been bought than call options that would gain value when futures prices fall and implied yields rise. That is especially the case in the March contract where the put-to-call ratio of 1.23 suggests bearish sentiment on 10-year Treasury note futures.
