Record Trade in 10-Year Futures Casts Shadow Over Treasury Rally

(Bloomberg) — A huge block trade seen Tuesday in US Treasury futures was the largest of its kind since 2013, and it may serve as a signal that the recent bond market rally is hitting a wall. 

A single trader appears to have sold 78,000 contracts of benchmark June Treasury 10-year futures on Tuesday morning, London time — equivalent to a $5 million bet on each basis point change in the 10-year yield. 

Buying and selling in futures markets is anonymous, making it hard to identify the firms involved and the exact details of the transaction. But the time and pricing when the block took place suggests the trader doesn’t expect yields to continue to move lower, as they have over the past two months. 

The CME said it was the largest block seen in the Treasury 10-year futures market since January 2013. A similar bet on 10-year notes themselves would have required a roughly $6 billion trade, according to Bloomberg calculations. 

The huge transaction comes after a recent rally in Treasuries that has sent 10-year yields from around 4.8% down to as low as 4.1% Tuesday. 

Over the past few weeks, there has been a barrage of bullish and now profitable in-the-money call options targeting lower 10-year yields. Some analysts suggested that Tuesday’s big block may have represented a player in the markets taking profits on some of these earlier trades. 

“TY call buying seen over the last two weeks may be getting monetized/hedged,” Citi strategists Ed Acton said in a note on Wednesday morning, referencing the trade.

After the big transaction on Tuesday morning, trading in the June contract was choppy. By the end of the day in New York, open interest in the contract fell by roughly 117,000, indicating an overall decline in bets on Treasury notes, according to CME data released on Wednesday. 

Yields on 10-year bonds rose roughly 9 basis points to end Tuesday at 4.24%. Those moves flipped the block trade from a roughly $5 million loss at one point to a $45 million paper profit. 

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