10-year yield at 2.6%? Market’s abuzz over huge options wagers

Bloomberg/Katherine Greifeld and Edward Blongbroke/6-13-2018

“The lifespan of the wagers covers several months of potentially rough roads for financial markets, with trade tensions brewing, key central-bank meetings looming and U.S. inflation accelerating. Of course, the trades could be a hedge for an existing short position, rather than an outright bet on lower yields. Either way, it signals expectations for turbulence ahead, with the potential for haven flows into Treasuries.”

USAGOLD note:  This options wager is an interesting development. It could be tied to CNBC’s important revelation over the weekend that the Fed might include language in its statement later today about moving the rate on excess reserves to near par with the federal funds rate.  As we mentioned a few days ago, this policy maneuver sends a clear signal that the Fed is interested in pushing those excess reserves out to the commercial banks and from there into the economy in the form of new consumer and commercial lending.

If the Fed chooses to go this route, and, we emphasize, if it is successful in accomplishing its mission, the end result would be to pump up the moribund money supply and push up the inflation rate, or at the very least, accommodate rising price and wage inflation.  All of this, in turn, might “red flag” the dollar and “green flag” gold and bonds  – hence, the options bet on higher bond prices.

All of this, of course, is speculation on our part and should be weighed as such. We will know more in a couple of hours and as more news and commentary on the subject become available.  As it stands at the moment, the dollar is falling, the 10-year is neutral, gold is rising.

Related, please see:

The Fed has a surprise in store that could mean an early end to interest rate hikes

Will banks’ excess reserves fuel a new monetary crisis?” [News & Views/March, 2017]

Gold a safe harbor on an ocean of excess reserves” [News & Views/January, 2016]

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