Evaluation: Dueling bets earlier than the elections within the US monetary market

© Reuters. FILE PHOTO: US dollars are counted out by a banker at a bank in Westminster

By Gertrude Chavez-Dreyfuss and Saqib Iqbal Ahmed

NEW YORK (Reuters) – The US financial market, valued at $ 20 trillion, is showing signs of life after months of drowsy trading.

Goldman Sachs (NYSE :), BlackRock (NYSE :), and UBS are among those who believe the recent rally in government bond yields, which are reversing prices, could go a little further, driven by expectations that the Lawmakers at some point will deliver a second round of fiscal incentives to get the economy out of its coronavirus-induced slump. Leveraged investors' net bets on lower prices for 30-year government bonds hit record levels in the futures markets last week.

Still, BlackRock believes any further rise in yields will be limited, with the Federal Reserve likely to step in to prop up markets. In the past few days, other investors have also been betting that a COVID-19 resurgence and the possibility of a closer-than-expected presidential race could lower returns, especially if the election results in a divided government where continued political turmoil diminishes or could delay the stimulus package.

The steps illustrate how divergent views about future US economic performance have reintroduced a measure of the volatility of the US Treasury bond market.

The expectation of a record low in interest rates in the coming years had largely suppressed market volatility after a sharp decline in yields from coronaviruses in March. Some of this volatility has crept back into the market in the past few weeks. The ICE (NYSE 🙂 BofA MOVE Index (), which tracks traders' expectations of volatility in the treasury market, is nearing its highest level since June.

Graphic: Bond-Kreisel

Hugo Rogers (NYSE :), chief investment officer of private bank Deltec International Group, recently added positions in longer-term government bonds, in part in anticipation of a Democratic failure to win a "blue sweep" in next week's elections. will lead to collecting prizes.

The rally in returns "is another false dawn," he said. "It's a bet on a clean democratic fight, and frankly some of those races in the Senate look very accurate."

Exchange-traded funds reflect changing bets on government bonds as benchmark 10-year government bond yields fell earlier in the week but rose 0.83% on Thursday.

The iShares 20+ Year Treasury Bond Exchange Traded Fund (O :), a way that investors play moves in the Treasury market, saw some of the largest inflows among ETFs earlier this week, but was broken according to Christopher Murphy, co., Am Thursday hit by outflows – Head of derivatives strategy at Susquehanna Financial Group.

In the options markets, the misalignment that measures the demand for put options in relation to call options has shifted the risk of a sharp move toward rising and falling TLT, Murphy said. The increase was close to the two-year high at the beginning of the month, which was due to expectations of rising yields.

Options investors also entered into straddle trades earlier this week that would benefit from a 10-year return between 0.65% and 0.85%, said Patrick Leary, chief market strategist and senior trader at broker-dealer Incapital.

While a "decent section of the fast money community thinks of the" blue wave "scenario and the big fiscal stimulus, that was only part of the deal," said Haider Ali, head of US treasury trading at RBC Capital Markets .

Real money accounts, a term often used to describe asset managers like insurance companies and pension funds, "don't buy into the narrative that this reflation trade is going to kick in, and they position themselves accordingly," he said.

Graphic: Treasurys – CFTC net positions

Ultimately, how the rally plays out may depend on whether the Fed – which concludes its policy meeting on November 5th, the day after the Treasury Department issued its quarterly refund statement – allows yields to rise further in the months ahead.

"The market knows there is a level that would cause (the Fed) to act," Leary said. Ten-year returns "would be well above 1.0% if the prospect of Fed purchases did not wait in the starting blocks."

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