A $5 Billion Bet on U.S. Yields at 1.37% Builds in Asian Hours

A Treasuries bear has bulldozed its way through the normally sedate Asian options market.

Over the past six sessions, a large trade known as a risk-reversal has been established, buying bearish put options on 10-year Treasuries and selling bullish calls. The bets total 50,000 contracts, a notional value of $5 billion, and stand to profit from a rise in benchmark yields to about the 1.37% level.

The strategy can tolerate a drop in yields to near 0.85% level, but a decline below that exposes the investor to losses of over $4 million per basis point. The 10-year yield hovered near 1.04% Wednesday.

A $5 Billion Bet on U.S. Yields at 1.37% Builds in Asian Hours

As the Asian trading session for Treasuries and their various derivatives is typically quiet, the bets stand out as they were executed in blocks, which are less common. This suggests the same investor is likely behind the strategy, and could well be a holder of Treasuries in the region that is looking to hedge a position.

The benchmark yield has pared its post-U.S. election surge in recent days, falling to 1.03% Monday from a high of 1.19% on Jan. 12. But the possibility of a Biden administration fiscal-relief package remains, and there is still enthusiasm in the so-called reflation trade that drove yields back above the key 1% level earlier this month.

See here for how the Treasury risk reversal was built up to 50,000

The bearish wager is at odds with other recent prints in the market. One stand out trade was a sale of options expiring in February, in a wager that yields will remain in a tight range until then.

Here is a list of some of the trades in the risk-reversal strategy:

MonthDayContractAmountBlock TradesPrice (ticks)
January20April 10-Year10,000138 Call133.5 Put6
January22April 10-Year10,000138 Call133.0 Put2
January25April 10-Year10,000138 Call133.5 Put4
January26April 10-Year10,000138 Call133.5 Put0
January27April 10-Year10,000138 Call133.5 Put1

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.