U.S. options traders bet Treasury yields will continue to rise

NEW YORK, Feb 18 (Reuters) - Traders in the U.S. options market are betting that long-dated Treasury yields, which this week jumped to the highest level in more than a year, will continue to rise.

Bearish bets on the TLT exchange-traded fund, which tracks longer-dated Treasuries, have increased dramatically in the past two weeks, said Chris Murphy, co-head of derivative strategy at Susquehanna Investment Group. Derivative traders are pricing in big swings lower in the price of Treasury bonds, and therefore big swings higher in yields.

The implied volatility for 15% out-of-the-money options had risen on Thursday to 28% from 17.65% two weeks prior, said Murphy.

“The options are pricing a risk of a sharp move lower in bond (prices) and higher in yields. On the flip side, for bond (prices) higher and yields lower, the options are pricing in less violent moves in that direction,” said Murphy.

Expectations of higher inflation, the promise of further federal stimulus and improving economic data pushed the benchmark 10-year Treasury yield on Wednesday to its highest level since January 2020.

Congressional Democrats are working to pass President Joe Biden’s $1.9 trillion COVID-19 stimulus plan early this year. The sprawling relief package - which would be one of the largest stimulus measures ever passed by Congress - is Biden’s top priority as he grapples with a pandemic that has killed nearly 500,000 Americans, thrown millions out of work and bruised the economy. The Biden administration has also discussed a separate measure to modernize U.S. infrastructure that would boost the U.S. economy and create millions of jobs.

More federal spending means the issuance of more Treasury debt, which would push bond prices lower and yields higher.

“The amount of stimulus coming down the pike in 2021 is huge,” said Andrew Brenner, head of international fixed income at NatAlliance Securities.

“(The move in TLT) is indicating higher rates,” said Brenner. (Reporting by Kate Duguid in New York Editing by Matthew Lewis)