US long-term borrowing costs have climbed to their highest level in almost 25 years as a sell-off in the Treasury market picked up pace.
The yield on the 30-year US Treasury rose 0.06 percentage points in afternoon trading in New York on Tuesday to 5.62 per cent. This was its highest level since June 2002.
The 10-year Treasury yield also rose as much as 0.05 percentage points to 5.29 per cent, taking benchmark US borrowing costs to another post-2007 high.
Bond yields rise when bond prices fall.
Options trading in BlackRock’s iShares 20+ Year Treasury Bond ETF, known by its ticker TLT, has surged. The fund’s 20-day average options volume has reached an all-time high since its launch.
Open interest in TLT options has also more than doubled over the past year and is now close to the record of 13.55 million contracts set ahead of last week’s monthly expiry.
Why US bond yields are rising
The sell-off in bond markets has become stronger in recent weeks as higher oil prices add to inflation concerns and strong US economic data increase expectations that the Federal Reserve may raise interest rates further.
US Treasury Secretary Scott Bessent has tried to slow the sell-off. But those efforts have so far failed to stop the rise in long-term yields.
The 30-year Treasury yield has climbed from around 5.2 per cent in mid-August, when Bessent announced an expanded programme to buy back long-term government bonds.
“The path of least resistance appears for the term premium to blow out further,” Arun Sai, a multi-asset strategist at Pictet Asset Management, told FT.
He was referring to the extra yield investors demand to hold longer-term government debt. “Investors are in no hurry to add duration,” Sai added.
Speaking to the Financial Times, Kristina Hooper, chief market strategist at Man Group, said the rise in yields on long-term bonds also reflects “increasing concern about fiscal sustainability”.
She also pointed to higher inflation caused by the energy crisis linked to the US-Iran war. US national debt crossed $40 trillion last month, while government borrowing continues to rise at a historic pace. This has increased investor concerns about the future of the country’s public finances.
Hooper said “US Treasuries’ attractiveness to investors, especially foreign buyers, will diminish given the US’s fiscal path” and the “unpredictability” of Washington’s foreign policy.
Oil prices keep inflation fears alive
Oil prices had fallen earlier this month but have moved sharply higher again in recent days as hopes for a US-Iran peace deal have weakened.
Higher crude and diesel prices have added to inflation worries and pushed Treasury yields higher. Fed officials have also indicated that more rate increases may be needed if inflation does not ease, after the central bank raised interest rates by 25 basis points this month.
Several important economic reports are due this week. The Commerce Department will release the Personal Consumption Expenditures, or PCE, price index on Wednesday. The report is closely watched by the Fed and could influence the outlook for interest rates.
More labour market data will also be released during the week, ending with the government’s monthly payrolls report on Friday.
“PCE tomorrow is going to be big, so we’ll see where that takes us,” Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder in New York, told Reuters.
“The amount of negativity from consumers here, especially with higher rates, higher gas prices, they’re getting squeezed, the consumers getting squeezed here, and we might start seeing (stocks sell off), at least in the consumer names.”
Traders rush into TLT options
The rise in Treasury yields and the big price moves in the bond market have also made options more attractive to investors looking for protection.
TLT’s implied volatility and put option premiums have both risen to their highest levels since late March. This suggests investors are willing to pay more to protect themselves against, or directly bet on, another rise in Treasury yields.
The increase in options activity is coming from institutional investors as well as some retail traders.
Over the past week, the activity has spread beyond TLT to BlackRock’s iShares iBoxx Investment Grade Corporate Bond ETF, known as LQD, and its iShares iBoxx High Yield Corporate Bond ETF, or HYG.
More equity-focused investors are moving into interest-rate markets through ETF options, which let them gain bond exposure and hedge rate risks without directly trading bonds. Nomura’s Alex Kosoglyadov said traditional stock investors are increasingly looking at rates products.
ETF options are becoming another tool alongside swaps and futures. TLT’s open interest is nearing a record 13.55 million contracts. The growing use of these products could also deepen the link between stock and bond markets, especially during periods of market stress.
Stocks remain relatively steady
Despite the heavy selling in bond markets, other assets that are usually seen as riskier, including stocks and corporate credit, have remained relatively resilient.
The S&P 500 fell 0.2 per cent on Tuesday but is still less than 2 per cent below its all-time high reached in August.
The Nasdaq 100 gained 0.2 per cent.
Disclaimer: This article is for informational purposes only and should not be treated as investment advice. Please consult a qualified financial advisor before making any investment decision.