Trader Makes Massive Bet Treasuries Will Get Slammed After Jobs Report

(Bloomberg) — The options market for US Treasuries was abuzz Thursday following the emergence of a large bearish wager that Friday’s jobs report will trigger the biggest backup in benchmark yields in more than nine months.

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The trade targets a surge in US 10-year yields to as high as 4.15% by Friday’s close of business, or a jump of about 0.15 percentage points from Thursday’s closing level. That would mark the biggest one-day rise in 10-year yields since late March and a further retrenchment for Treasuries, which have had a rocky start to the year after ending 2023 on a winning note following a furious two-month rally.

The timing of the bearish bet comes just ahead of the December jobs report, due at 8:30 am New York time Friday, with expectations rising for a robust readout. Separate data released Thursday showed hiring by US companies ramped up in December, while first-time jobless claims fell in the latest week, the latest signs of a resilient labor market.

“If I was a fund manager or a market participant, I’d think some cheap option protection right now would be advisable because the market’s overplayed the disinflation narrative,” said Stephen Miller, a three-decade bond market veteran who now works as an investment consultant at GSFM. “So it makes sense that there’s such a bearish wager in markets.”

The options action was in the so-called Friday Week One 10-year January Treasury options, which are often used to hedge positions over specific risk events such as Fed policy meetings or jobs reports. The buying seen Thursday was notably aggressive, with a position building of around 20,000 options for a premium of roughly $625,000.

Should the 10-year yield end the day at 4.20% — approximately 20 basis points higher than current market levels — the profit on the trade could reach about $10 million, according to a Bloomberg scenario analysis. The yield was around 3.99% in Asia trading Friday.

Friday’s report is expected to show US employers added 175,000 jobs last month, with the so-called whisper number calling for an increase of 185,000 positions. Meanwhile, the Bloomberg Economics’ nowcast points to a 283,000 monthly increase in nonfarm payrolls, up from 199,000 in November, and a further drop in the unemployment rate to 3.6% from 3.7% a month earlier.

A strong report would add to evidence of economic strength that has already caused traders to ratchet back expectations for Federal Reserve interest-rate cuts as soon March, and trim gains from the recent rally. US 10-year yields — the benchmark rate for everything from mortgages to loans — have added about 12 basis points since the start of the year, reversing a decline that sent them more than a percentage point lower in the final two months of 2023.

For Miller, data on US wages will be closely parsed by traders.

“A key number we should be watching out for is the hourly earnings – if we don’t get 3.9%, that might be a catalyst for some big moves in Treasuries,” he said.

(Updates with comments.)

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