The options market for US Treasuries witnessed heightened activity on Thursday as a significant bearish bet emerged, anticipating that Friday’s jobs report would lead to the most substantial increase in benchmark yields in over nine months. The trade specifically targets a surge in US 10-year yields, aiming for levels as high as 4.15% by the close of business on Friday, signifying a jump of approximately 0.15 percentage points from Thursday’s closing level. If successful, this would mark the most significant one-day rise in 10-year yields since late March and further setbacks for Treasuries, which faced challenges at the beginning of the year after concluding 2023 on a positive note following a two-month rally.
The timing of this bearish bet aligns closely with the imminent release of the December jobs report scheduled for 8:30 am New York time on Friday. Expectations for a robust report have grown, supported by separate data released on Thursday indicating increased hiring by US companies in December and a decline in first-time jobless claims, highlighting signs of a resilient labor market.
Stephen Miller, a seasoned bond market veteran now working as an investment consultant at GSFM, suggests that considering the market’s overplayed disinflation narrative, obtaining cheap option protection is advisable for fund managers and market participants. This reasoning may explain the notable aggressiveness seen in the options market, particularly in the Friday Week One 10-year January Treasury options. Approximately 20,000 options were accumulated on Thursday for a premium of around $625,000.
According to a Bloomberg scenario analysis, if the 10-year yield reaches 4.20% by the end of the day — about 20 basis points higher than current market levels — the potential profit on the trade could reach approximately $10 million. In Asia trading on Friday, the yield stood around 3.99%.
The upcoming jobs report is expected to reveal an addition of 175,000 jobs in the US last month, with a whisper number suggesting an increase of 185,000 positions. Bloomberg Economics’ nowcast indicates a more optimistic scenario, projecting a monthly increase in nonfarm payrolls to 283,000, up from 199,000 in November, and a further decrease in the unemployment rate to 3.6% from 3.7% the previous month.
A strong report could reinforce evidence of economic strength, causing traders to reconsider expectations for Federal Reserve interest-rate cuts as early as March and potentially impacting gains from the recent rally. US 10-year yields, a benchmark rate for various financial instruments, have already increased by about 12 basis points since the beginning of the year, reversing a decline that sent them more than a percentage point lower in the final two months of 2023.
For Miller, a crucial factor to watch will be US wage data, particularly the hourly earnings figure. He notes, “A key number we should be watching out for is the hourly earnings – if we don’t get 3.9%, that might be a catalyst for some big moves in Treasuries.”
