Option Trader Sets Up $10M Trade on 10Y Yield Rising to 4.20%
Investors anxiously await the imminent December jobs report, with many expecting a robust reading. A larger-than-expected increase could force Federal Reserve policymakers to reconsider their plans for a dovish pivot and keep interest rates higher for longer to avoid another spike in inflation levels. Meanwhile, a $10 million bearish wager emerged in the options market, betting that the non-farm payrolls (NFP) data will trigger a significant spike in Treasury yields.
The Trade
Raising many eyebrows in the options market on Thursday, one trader revealed a massive bearish bet, anticipating a substantial surge in benchmark yields driven by the upcoming Friday’s jobs data.
The trader is wagering that Friday’s NFP data will cause a spike in 10-year US yields to as high as 4.15% by the market close, representing an increase of around 0.15 percentage points from Thursday’s closing level. Should that happen, it would represent the largest one-day jump in 10-year yields since late March.
The move comes amid the so-called Friday Week One 10-year January Treasury options, which traders typically utilize to hedge against high-impact events like Fed policy meetings or jobs reports. The aggressive buying activity on Thursday resulted in a position of around 20,000 options for a total premium of roughly $625,000.
According to an analysis by Bloomberg, if the 10-year yield reaches 4.20% by the end of the day—roughly 20 basis points higher than the current market levels—the potential profit on this trade could amount to about $10 million. As of Asia trading on Friday, the yield stood at around 3.99%.
Robust Jobs Data Could Complicate Fed’s Plans for a Dovish Pivot
The timing of the bearish wager comes just before the last monthly jobs report for 2023, which is set to come out at 8.30 am New York time. Consensus expectations point toward robust December data; if those materialize, it could significantly complicate the tasks facing the Federal Reserve’s policymakers.
Notably, a larger-than-expected increase in added jobs in December would indicate a resilient labor market, one of the primary inflation drivers over the past two years. As a result, a strong reading could complicate the Fed’s plans of a dovish pivot this year and force the US central bank to keep interest rates higher for longer to keep inflation in check.
The imminent Friday jobs report is anticipated to reveal that US employers added 175,000 jobs in December. A more discreet estimate, known as the “whisper number,” suggests an increase of 185,000 positions. Meanwhile, Bloomberg Economics’ nowcast projected a monthly surge of 283,000 in nonfarm payrolls, a notable rise from the 199,000 reported in November.
A stronger-than-expected reading will likely trigger a reaction in 10-year yields due to its role as a key economic indicator. Vigorous job growth often raises expectations for economic expansion, increasing the 10-year yield as investors anticipate higher inflation and the potential for tighter monetary policy.
Will the massive bearish wager pay off following Friday’s jobs data? Let us know in the comments below.
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