US Treasury trading was mixed on Friday, with the long end rising while shorter maturities and the belly eased back from multi-year highs. The 10-year yield stayed near 5.20% after reaching a 19-year peak of 5.228%, and the 30-year yield briefly touched a 22-year high. By late trade, the 30-year was unchanged at 5.488% after earlier hitting 5.5016%, its highest level since June 2004.
This week’s move followed last week’s 25-basis-point Fed increase alongside fresh hawkish messaging, including comments from New York Fed President John Williams and Philadelphia Fed official Anna Paulson, as well as Governor Michael Barr’s remarks on the case for further tightening. Money markets priced a 64% probability of a hike at the 28 October meeting, rising to 92% for December, according to Prime Terminal. Measures of inflation expectations rose, with one-year views increasing from 4% to 4.6% and five-year expectations edging from 3.3% to 3.4%, while core capital goods orders climbed 1.6% in August. Oil prices remained elevated as the US-Iran war continued.
Derivative Trade Recommendations Amid Surging Yields
With the 30-year yield hitting a 22-year high near 5.50%, we recommend derivative traders position for further bond price declines in the coming weeks. Buying put options on the iShares 20+ Year Treasury Bond ETF (TLT) or shorting 30-year Treasury futures offers a direct way to profit from this intense pressure on the long end of the curve. Historically, when long-term yields break decades-long resistance levels, as we saw during the major bond market sell-offs of late 2023, the upward momentum can quickly carry yields much higher.
Defensive Positions and Yield Curve Volatility Strategies
Given the 92% market probability of a Fed rate hike by December, we should also target December SOFR (Secured Overnight Financing Rate) futures to capture this hawkish shift. Buying put options on these short-term interest rate contracts allows us to limit our risk while betting on higher policy rates. This defensive setup is highly necessary now that previously dovish central bank officials are turning unexpectedly hawkish.
Elevated oil prices and rising inflation expectations mean we must also hedge against further yield curve volatility. We suggest trading bear steepeners by purchasing put options on long-term Treasuries while buying call options on short-term notes. Historical data shows that during energy-driven inflation spikes, the spread between short- and long-term yields can widen by over 50 basis points in a matter of weeks, offering a highly lucrative window for options traders.
