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Risk of Treasuries Selloff

Why don't investors seem to expect interest rates to continue rising?

By Liz Capo McCormick, Bloomberg | Updated on February 17, 2016

Demand for options that protect against higher long-term interest rates is the weakest since October, signaling to some analysts that yields are poised to rise from close to the lowest in more than three years.

An indicator known as the swaption skew, which traders watch for a hint of where yields are headed, hasn’t been as biased toward lower rates since October. Ten-year Treasury yields reversed course that month, rising almost 0.5 percentage point within about three weeks and halting a rally that followed the Federal Reserve’s September decision to forgo lifting its target from near zero. Movements in swap rates tend to mirror the direction of Treasury yields.

“The market is not pricing in higher rates right now, so the cost of insuring against that in options is low,” indicated by the skew, said Scott Buchta, head of fixed-income strategy at Brean Capital in New York. “I’d be counterintuitive here—and be totally hedging for higher rates. The market is so dislocated from the Fed now with their forward rate projections.”

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