Traders Seeking Ukraine Haven Pile Into Treasury Wagers

Options traders are pushing the price of betting on a rally in Treasuries to the highest in almost two years.

Calls on the iShares 20+ Year Treasury Bond ETF are the most expensive since July 2012 relative to puts, data compiled by Bloomberg show. That’s a reversal from November, when concern about the curtailment of Federal Reserve stimulus left bearish contracts costing the most in almost five years relative to bullish options. The Treasury ETF, tracking U.S. debt maturing in 20 years or more, has risen 5.7 percent this year.

After their worst year since 2009, Treasuries are enjoying a revival. U.S. government debt posted the biggest weekly gain in two months as concern grew that unrest in the Crimea region and signs of slowing growth in China could derail the global economic recovery.

“There are concerns for global risk, both in the Ukraine situation and the Chinese economic slowdown,” Jerry Braakman, chief investment officer of First American Trust in Santa Ana, California, said in a March 14 telephone interview. His firm manages $1.1 billion, including government bonds. “Nobody knows what the impact on markets could be. We’ve seen that hit emerging markets, and that flows back into U.S. Treasuries.”

Yields Fall

Benchmark 10-year yields fell 13 basis points to 2.66 percent last week, before adding four basis points to 2.69 yesterday, Bloomberg Bond Trader data showed. Global bond funds took in $3.4 billion in the week ended March 12, according to EPFR Global. That contrasts with developing-nations stocks funds, which posted a 20th week of withdrawals, Citigroup Inc. wrote in a March 14 report citing EPFR Global figures.

Almost $1.7 trillion was erased from global equities between March 6 and the end of last week, data compiled by Bloomberg show. The MSCI Emerging Markets Index has slumped 5.9 percent this year, and the Standard & Poor’s 500 Index fell 2 percent last week, the biggest drop in seven weeks.

The U.S. and the European Union imposed sanctions on Russia in their worst dispute since the Cold War. A total of 96.8 percent of Crimean voters backed joining Russia in a March 16 referendum, paving the way for President Vladimir Putin to annex the peninsula from Ukraine.

China Concern

While watching the tension in Crimea escalate, investors are also grappling with lower growth expectations for the world’s second-largest economy. Reports last week showed China’s factory output rose in January and February at the slowest pace since the global financial crisis, as retail sales grew at the weakest rate for the period since 2004.

Bank of America, UBS AG, JPMorgan Chase & Co. and Nomura Holdings Inc. have reduced forecasts for China’s 2014 economic expansion.

Bullish options for a 10 percent increase in the Treasury ETF cost 0.62 point more than bearish bets hedging against a 10 percent decline, according to three-month implied volatility data compiled by Bloomberg. In November, calls were 3.83 points cheaper than puts, the highest level since March 2009.

The last time investors paid this much for bullish options relative to bearish ones was in 2012, when concern that Europe’s debt crisis was spreading underpinned demand for U.S. bonds.

Raising Rates

The Fed may have to raise interest rates sooner than anticipated, which would hurt long-term Treasuries, according to David Kelly, the chief global strategist at JPMorgan Funds.

Fed Chair Janet Yellen reiterated her pledge to delay raising rates at least as long as unemployment remains above a 6.5 percent threshold. Economists expect the central bank will drop its limit to adopt a more qualitative guidance, according to a Bloomberg News survey yesterday. The jobless rate was 6.7 percent in February, and the median forecast of economists calls for a decline to 6.2 percent in the fourth quarter.

“If the U.S. economy continues to improve, the Fed will have to hurry up its timetable for raising interest rates or deal with inflation,” Kelly said in a telephone interview from New York. His firm oversees about $400 billion. “Either would be very negative for long-dated Treasuries. People who are betting on Treasuries right now -- that’s a dangerous game.”

The central bank has held the nation’s target interest rate at virtually zero since 2008. In December, 15 out of 17 policy makers said the Fed wouldn’t raise rates until 2015 or later.

Fed Stimulus

The Fed began slowing the pace of its bond purchases this year and now buys $65 billion a month after two cuts of $10 billion each. The central bank will probably announce the end to its asset-purchase program at its Oct 28-29 meeting, according to economist forecasts in a Bloomberg News survey yesterday. The Federal Open Market Committee is expected to announce another reduction in purchases after a two-day meeting ending tomorrow.

Strategists had predicted Treasuries would post losses for a second straight year. So far, they’ve been proven wrong as turmoil in emerging markets overshadowed reports showing improvements in the U.S. labor market and retail sales. The U.S. debt has returned 1.96 percent this year, rebounding from a 3.4 percent drop last year, index data compiled by Bank of America Merrill Lynch show.

Volatility in Treasuries, as measured by the Bank of America Merrill Lynch MOVE Index, lost 1.6 percent to 61.83 yesterday. The gauge, which is based on prices of over-the-counter options on Treasuries maturing in two to 30 years, is 14 percent below its one-year average. The Chicago Board Options Exchange Volatility Index of S&P 500 options costs fell 7.2 percent to 14.52 at 4 p.m. in New York. Europe’s VStoxx Index slipped 6.3 percent to 20.11.

ETF Options

Of the five most-owned Treasury ETF options, three were bullish, according to data compiled by Bloomberg. Calls betting on a 4 percent rise to $112 by the end of the week had the largest open interest, followed by bets wagering on a 9.6 percent rally, the data show.

“We had the referendum over the weekend,” Anthony Valeri, a market strategist in San Diego with LPL Financial Corp., said by phone. “The next part of it is how Russia responds to expected sanctions. If they take a more aggressive approach in responding, there could be a rush into U.S. Treasuries. The other part of that is the Fed. The long-TLT strategy would be protecting from a long dovish shift from the Fed.”

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