If you want insurance against a bond market meltdown right now, it’s going to cost you. Premiums for hedging against deeper selloffs in US Treasuries have climbed to their highest level since March, as traders brace for the possibility that long-term yields have more room to run.
The 30-year US Treasury yield has surged to its highest point since 2007.
What’s driving the anxiety
The proximate cause is the Federal Reserve’s most recent policy meeting, which sent ripple effects across the entire rates market. Traders walked away from the decision with a growing sense that the Fed may be taking a more cautious approach to fighting inflation than many had hoped for.
One key measure tells the story clearly. The 1-month 25-delta skew, which tracks the relative cost of options that profit from rising yields versus those that profit from falling yields, has reached its highest point in roughly five months. When this skew moves sharply in one direction, it means options traders are collectively placing bets that the pain trade is to the upside in yields.
