SUPERNEWS

Macro

Treasury Bet Could Swing $15M on Yield Move, Amid Fed Watch

High-stakes Treasury options bet could yield $15M on inflation data; CLO equity attracts conservative investors; FX fears drive Treasury buys.

By Max Weldon

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5/10, 12:55 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
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Key Takeaway

  • A Treasury options trader could gain or lose $15 million based on 10-year yield movements, betting it hits 4.25% by May 24.
  • The high-risk position involves selling put options and buying call options with a $150,000 investment on 20,000 contracts.
  • This bet comes amid expectations of a Fed rate cut in July, with upcoming economic data and Fed Chair Powell's speeches as key influences.

Treasury Options Bet on Inflation Data

A bold move by a Treasury options trader has set the stage for a potential $15 million windfall or loss based on next week's inflation data. The trader's risk-reversal strategy involves selling put options and buying call options on the June 10-year note futures contract, with a modest investment of $150,000. This position, hinging on the 10-year Treasury note's yield movements, underscores the high stakes in anticipating economic indicators. The strategy profits if yields fall below 4.35% and loses if they rise above 4.58%, with rapid gains or losses beyond these thresholds.

CLO Equity Draws Conservative Investors

In a surprising shift, pension plans and insurers are venturing into the high-risk, high-reward world of CLO equity tranches, raising $3.1 billion for such strategies. This move into the $1.3 trillion credit market's riskiest tier reflects a hunt for yield, despite the inherent dangers and the potential for lower recoveries and actual losses. The surge in demand from traditionally conservative investors marks a significant shift, with sales of new US CLOs up 64% this year, despite warnings from experts about the precarious risk-reward balance.

Currency Crisis Concerns Fuel Treasury Purchases

Hugh Hendry, the former CIO of Eclectica Asset Management, warns of a 'Mad Max' deflation scenario reminiscent of the 1998 Asian financial crisis, driven by global FX weakness. Hendry's response to these fears includes buying long-dated calls on US Treasuries, betting on a dramatic drop in yields from 4.5% to as low as 1.2%-1.5%. This strategy is a hedge against a potential Federal Reserve pivot from high rates, which could trigger a surge in risk assets and significantly elevate asset prices.