Election and Fed Loom as Treasury Hedging Costs Climb

The cost of hedging against potential losses in U.S. Treasuries has surged to its highest point in 2024, driven by traders’ anticipation of significant upcoming events, such as payroll data releases, the U.S. election, and the Federal Reserve’s policy announcement. These events could exacerbate market losses, with traders expecting a further rise in yields. The bond market’s reaction is influenced by a robust U.S. economy, reducing expectations for Federal Reserve rate cuts and increasing concerns about a potential Republican government, which might lead to faster growth and inflation. In the options market, there is a notable preference for puts protecting against higher yields, reflecting a bearish sentiment as seen in recent trades targeting increased 10-year yields.