US Treasury Yield Spiral: Invisible Hedging Amplifies Price Swings

MacroDigital Finance

โดย Bloomberg·

Summary · why it matters

With long-term US Treasury yields at or near multi-year highs, invisible hedging trades are amplifying price moves. The US Treasury expanded its bond buybacks in an effort to curb borrowing costs, but upward pressure on rates from inflation concerns and a swelling fiscal deficit has outweighed that effect. Traders wary of further yield increases are hedging their portfolios through option purchases, and one recent notable trade was a large position betting that the 30-year yield would rise to about 5.7%, roughly half a percentage point above its current level. The sellers of these options must also sell futures or enter into swaps paying fixed rates to profit when rates rise, and trades known as convexity hedging and delta hedging can push swap rates higher and amplify market moves. Sean Zhou, a rates strategist at Morgan Stanley, noted that with yields at high levels, "some risks remain that are difficult for dealers to hedge," adding that "the response will likely be to keep delta hedging as rates rise." Convexity hedging is also taking place among mortgage investors and in the options market, and Zhou said "they are each reacting to the market environment as independent players, and both are of considerable size." In a rising rate environment, homeowners refinance less, so investors hold mortgage-backed securities longer than expected, and moves to sell bonds or enter swaps paying fixed rates to hedge this risk could add to upward pressure on benchmark Treasury yields. Because the Federal Reserve has reduced its holdings of mortgage-backed securities in recent years, "more convexity risk now sits with the private sector," Barclays strategists said in a report dated the 3rd. Meanwhile, a JPMorgan Chase survey of US Treasury clients published on the 9th showed that with yields near multi-year highs, bond investors are reducing short positions and shifting to a neutral stance, with the share of short positions falling 6 percentage points in the week through the 8th and neutral positioning rising by the same amount, leaving clients' net long positioning at its highest level since November 2025.

United States Government Bond 10Y ▲United States 30 Year Bond Yield ▲