Big Treasury Options Trade Shows Anxiety About Jackson Hole

(Bloomberg) -- Bond traders appear worried that Federal Reserve Chairman Jerome Powell’s Friday speech in Jackson Hole could reignite the rally that drove Treasury yields to multiyear lows last week.

A purchase of Treasury options for more than $8 million on Tuesday suggests that large positions -- the hedging of which contributed to the rally -- remain at risk in the event that Powell sounds dovish notes.

Despite subdued volumes in Treasury futures this week, there’s been big spending in options. Tuesday’s highlight was a hedge against 10-year yields falling to around 1.45%, breaching their Aug. 15 low, by the end of the week.

The bold manner in which the hedge was built (over 60,000 lots were done via two block trades) and the hefty tab don’t reveal whether it’s a gutsy outright punt on a dovish speech, or protection of a bearish options (short gamma) position. Either way, it shows little concern that Powell will echo Boston Fed President Eric Rosengren, who said this week that evidence of a U.S. slowdown was needed to justify further easing.

If the lull in futures volumes suggests that traders are reticent to set new duration positions at a fraught moment for Fed policy and U.S.-China trade relations, bursts of options activity can shed light on expectations. A $17 million short volatility wager in Treasury five-year options Monday was among other notable flows this week.

©2019 Bloomberg L.P.

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