via Zerohedge

Earlier today, when discussing the impending inevitability of negative rates in the US according to BMO rates strategists, we said that the question is not if but “when.” Now, according to at least one intrepid trader, the answer is that in just over three weeks the US may join Europe and Japan in the monetary twilight zone that is negative yields.

According to Bloomberg, during the big flow swings in the rates complex on Wednesday morning, there has been a distinct surge of activity in April 2020 Treasury note options, which are targeting a drop to negative Treasury yields for the 10-year futures cheapest-to-deliver bond ahead of March 27 expiry, which means that in just over three weeks at least one trader is betting the US will sport negative rates for the first time in history.

READ  We're about to suffer worse than I thought.

Specifically, someone bought 30,000 TYJ0 144.25 calls which mature at the end of the month at a price of 1 tick.

About 30,000 calls maturing at the end of this month traded at a strike price that begins to be profitable if yields fall to around -0.05%, compared with a current rate of about 0.85% for the corresponding bond in cash markets. Open interest of 243 contracts signals the position is new rather than covering a short position In English, this means that about $470,000 was spent on call options which give the owner the right to buy futures on 10-year Treasuries maturing in 2027 (or effectively 7 year paper as the cheapest-to-deliver) at prices that correspond to negative yields in cash markets.

READ  What The Boom In Fraud Says About The Current Market Environment

How negative? While the trade does not envision the entire curve turning sub zero, the strike price begins to be profitable if yields fall to around -0.05%, compared with a current rate of about 0.85% for the corresponding bond in cash markets, suggesting a roughly 90bps plunge in yields at the belly in the next three weeks, a move that is only feasible if the Fed cuts rates multiple times or if a great depression unexpectedly breaks out.

Considering that the market is already pricing in 43bps of rate cuts, the trade is effectively betting on an additional 47bps of easing in the coming weeks, or an additional 2 rate cuts.