The 30-year U.S. Treasury yield has surpassed 5%, and long-term municipal bonds have also plummeted, with bearish sentiment spreading across the U.S. bond market
The U.S. June CPI failed to quell tariff concerns, leading investors to cut September rate cut expectations, resulting in a sell-off of U.S. long-term bonds. A significant amount of capital has flowed into the options market, betting that the 30-year U.S. Treasury yield will rise to around 5.3% in about five weeks, a yield level that would be the highest since 2007, with total premiums for related options reaching $10 million
Concerns about tariffs are strong, and investors are increasing their bearish bets, with the 30-year U.S. Treasury yield breaking above 5%.
The U.S. June CPI data released overnight shows that although the core CPI increase was lower than expected, companies have begun to pass some tariff costs onto consumers, which has not alleviated market concerns about tariffs driving up prices, leading investors to reduce expectations for a Fed rate cut in September, resulting in a sell-off of long-term U.S. Treasuries.
On Tuesday, the 30-year U.S. Treasury yield rose above 5%, reaching a new high since early June. This marks a return of long-end rates to this year's high range.
Traders have significantly increased their bearish bets, wagering that the 30-year U.S. Treasury yield will jump to around 5.3% in about five weeks, with total premiums for related options reaching $10 million.
JP Morgan's latest client survey shows that investors' net long positions have shrunk to the smallest size in six weeks, reflecting a shift in market sentiment towards caution.
The options market signals bearish sentiment, and municipal bonds are also under pressure
The dynamics of the options market further confirm investors' pessimistic sentiment.
According to data from the Commodity Futures Trading Commission (CFTC), there has been a surge in demand for hedging against rising yields and further selling of long-term bonds, with related options premiums reaching their highest level in a month.
Large options trades indicate that investors are preparing for the 30-year Treasury yield to rise to around 5.3%, a level that would set a new high since 2007, reflecting deep concerns in the market about the trend of long-term rates.
Additionally, the skew indicator for the 30-year U.S. Treasury (where the implied volatility of low strike options is higher than that of high strike options) has sharply shifted towards bearish option premiums over the past week.
Besides U.S. Treasuries, on Tuesday, the U.S. municipal bond market also faced severe pressure. The benchmark yield on 10-year municipal bonds rose by 8 basis points to 3.25%, continuing the downward trend of U.S. Treasuries.
CreditSights senior municipal bond strategist Patrick Luby analyzed that this sharp decline has put greater pressure on the long bond yield curve:
“Long-end bonds lack meaningful incremental demand support and cannot attract buyers with higher yields, while front-end demand remains strong.”
