From investment banks to traders, Wall Street is ready: 10-year U.S. Treasury yield hits 5%

As concerns over U.S. debt and deficits escalate due to Trump's tax reform bill, traders are heavily betting that the yield on 10-year U.S. Treasuries will soar to 5%.

According to Bloomberg, traders are making large-scale bets that long-term U.S. Treasury yields will rise due to the U.S. government's ever-expanding debt and deficit worries, with Trump's tax cuts making the situation even more precarious.

Reports indicate that Wall Street strategists, including those from Goldman Sachs and JPMorgan Chase, are raising their yield forecasts. Among these, the positions betting on the 10-year U.S. Treasury yield reaching 5% are the largest.

CME's open interest data shows that there has been a massive bet on options trading for the 10-year U.S. Treasury yield to climb to 5% in the coming weeks, with a total amount reaching $11 million.

Downgrade Triggers Panic, 30-Year U.S. Treasury Yield Hits 5% Threshold

On Monday, the 30-year U.S. Treasury yield briefly surpassed 5%, reaching its highest level since November 2023, before retreating.

This sell-off was triggered by Moody's downgrade of the U.S. credit rating from Aaa to Aa1, which caused yields across all maturities of U.S. Treasuries to rise sharply in early trading on Monday, before later retreating to erase gains.

JPMorgan Chase strategists Jay Barry and Jason Hunter wrote in a report:

"Given the uncertainties surrounding trade and monetary policy, as well as the structural shifts in demand patterns, the risk is skewed towards a bear steepening in the short term."

According to the report, the amount of options to hedge against potentially larger losses at the long end of the U.S. Treasury curve has now risen to its highest level since April, when the market was shaken by the economic impacts of Trump's aggressive trade policies. The current trend in option skew indicates that traders are pushing up the prices of put options to hedge against the risk of soaring yields.

Investors Quickly Shift to Bearish Camp, Options Market Sees Frequent Anomalies

A JPMorgan Chase U.S. Treasury client survey released on Tuesday also emphasized expectations for higher bond yields.

The report showed that short positions in U.S. Treasuries have climbed to their highest level since February 10. However, as investor positions are more neutral than in early April, strategists expect "volatility to be significantly lower than last month."

In recent weeks, a trend of options flow to hedge against rising yields has formed, reflected in the so-called "option skew," which shows rising option prices in response to the bond market sell-off.

Traders are paying increasingly higher premiums to hedge against sell-offs at the long end of the curve, consistent with the recent breach of the 5% level in the U.S. 30-year Treasury yield on Monday and the steepening trend of the U.S. Treasury yield curve. The skew of put options in long-term bond contracts has now reached its highest level in about a month.

For the week ending May 13, CFTC data shows that asset management firms liquidated a large number of long positions, while hedge funds closed out short positions.