(Bloomberg) -- Bond traders are paying the highest premiums since March to protect against a further climb in longer-dated yields, as the fallout from this week's Federal Reserve policy meeting continues to ripple through the rates market.
With worries that the Fed may not act quickly enough to tamp down inflation pushing 30-year yields to their highest level since 2007 in recent days, the cost of hedging against deeper losses is growing: The premium on puts versus calls, shown by an implied volatility measure of 1-month 25-delta skew, stands at its highest in about five months.
Investors are hedging in both 10- and 30-year tenors through a range of option structures around September Treasury puts. The positioning suggests they are concerned that rates will become more volatile if inflation fears persist. The ICE BofA MOVE Index, a proxy of Treasury market volatility, has remained comparatively subdued despite the recent climb in yields.
Price action in Treasuries was bearish again on Friday, as yields extended their climb in the long-end of the curve, matching gains seen in oil and across European bonds. Flows on Friday showed investors targeting a 10-year yield move toward 4.8%, roughly 10 basis points above its current level.
Investors have grown increasingly concerned that Fed Chairman Kevin Warsh won't manage to rein in inflation, which has run above the central bank's target for five straight years.
On Wednesday, a huge buyer of US long-bond puts paid a premium of around $20 million to hedge a move in 30-year yields up to around 5.3%, after the Fed kept interest rates unchanged for a seventh consecutive month. The price of that option — purchased between 23 to 37 ticks — has soared and stood at 75 ticks on Friday.
Larger option flows seen since the Fed meeting have targeted a 10-year yield as high as 4.9% and a 30-year yield rising to as much at 5.42%, just below the 2007 high.
More stories like this are available on bloomberg.com
