Global Bond Traders Are Betting Against the Latest Trump Threat

(Bloomberg) -- Bond investors are betting that trade tensions will abate to send global yields rising again.

Investors are buying put options on Treasuries and German bunds, positions that will pay off from a decline in some of the world's safest assets. The demand for the contracts, particularly among Asia-based traders, is seen coming from those who expect the latest escalation in the U.S.-China trade conflict to be short-lived.

Bond yields steadied Tuesday on news that China's top trade negotiator Liu He is set to visit the U.S. this week for trade talks, following a slide Monday after U.S. President Donald Trump said he would increase tariffs on $200 billion of Chinese imports Friday to 25 percent from 10 percent.

“The market is therefore positioned optimistically, expecting China to capitulate and for a U.S.-China trade deal to be struck,” said Peter Chatwell, head of European rates strategy at Mizuho International Plc. “If these trades are a speculative play, then we really need to see a U.S.-China deal and strong U.S. inflation by the end of the week for them to work.”

Investors have rolled out an options trade via German bund futures from June into July, effectively targeting 10-year yields rising by around nine basis points over that period. That followed a trade on similar-dated Treasuries targeting yields to rise 15 basis points.

U.S. 10-year yields rose one basis point to 2.48 percent as of 10:45 a.m. London time, while those on their German peers fell two basis points to minus 0.01 percent. Global yields have fallen this year amid fears over trade and the possibility of a recession on the horizon.

--With assistance from James Hirai and Stephen Spratt.

To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee

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