Trader Turns $60 Million Profit in Sharpest Bond Selloff of 2017

Updated on

One bond trader made a very timely bet on a selloff in the Treasuries market -- and is about $60 million in the black because of it.

The 30-year Treasury yield has soared 13 basis points to start the week, the steepest two-day increase in a year. The selloff has caused pain for some, including hedge funds and other large speculators, who ramped up net long positions in Treasury bond futures to a near-record in the week through Dec. 12, according to Commodity Futures Trading Commission data.

But at least one large position amassed last week looks prescient. Someone bought 50,000 put options on bond futures at an average price of 1’04 ticks, according to a trader familiar with the transaction, wagering that the price of long-dated Treasuries would fall as 30-year yields increased. That price jumped to 2’21 ticks Tuesday amid a sustained climb in long-end yields to 2.82 percent, leaving the bet showing a profit of about $60 million.

Now, it could be a timely outright bet. But by the looks of it, it’s more likely a hedge against short volatility that just so happened to come before a steep selloff in an otherwise quiet period for long-term Treasuries. 

In earlier trading Tuesday, selling of bond option put spreads suggested rolling down the strike price from last week’s long position. Those new lower strike prices will profit from an extended selloff. 

Whether that happens may depend on the market’s reaction to the tax overhaul bill on which Congress is set to vote, and also whether the decline has scared away the speculators who thought the Treasury curve would only flatten further. The yield spread between five- and 30-year Treasuries widened on Monday by the most since September.

“While we’re confident in the longer-term prospects for a flattening, the combination of the headlines around tax legislation, the outside day in curves and the building positions suggests some scope for a material correction before we head flatter,” BMO Capital Markets strategists Ian Lyngen and Aaron Kohli wrote in a note Tuesday.

    Before it's here, it's on the Bloomberg Terminal.