Economy

NEW YORK (Reuters) – Investors in the futures options market are betting the benchmark U.S. 10-year Treasury yield is headed higher to 5% in the near term, reflecting worries that the incoming Trump administration’s policies will increase an already bloated fiscal deficit and revive inflation.Traders are watching that key 5% level in the 10-year note, which, if hit, could be bad news for U.S. stocks, much like it was in October 2023 when the 10-year yield climbed to 5.02%. That coincided with the benchmark S&P 500 index dropping to a five-month low. Higher interest rates in general also mean increased borrowing costs for consumers and businesses.In swaptions, or options on interest rate swaps, the market is also pointing to higher 10-year rates, although not as straightforward as those on Treasury futures. As President-elect Donald Trump nears his Jan. 20 inauguration, market participants have become increasingly anxious about his pledge to impose widespread tariffs on imports, a move widely viewed as inflationary, as they wager that Treasuries will sell off, pushing yields higher. “It’s all about the unknowns and the policy fog,” said Chip Hughey, managing director of fixed income at Truist Advisory Services in Richmond, Virginia. “That uncertainty revolves around the scope of tariffs and what that may mean ultimately for inflation.” Tax cuts are also one of Trump’s campaign promises, which should benefit consumers and businesses overall. But if tax cuts are not financed by spending reductions, they will likely expand the federal deficit. That means more Treasury debt issuance flooding the market to manage the spending gap, pushing interest rates higher.Analysts said open interest, the amount of outstanding positions held by traders, is building in the March contract for 10-year Treasury futures put options, with strikes in the 105 to 106 price levels, according to traders, citing their data on Thursday. Those strikes target the 10-year yield hitting between 4.75% and 5.00%.Treasury put options are typically used to position for a decline in bond prices that leads to higher implied yields.The U.S. 10-year yield was little changed on Thursday at 4.689%, after hitting a roughly eight-month peak of 4.73% on Wednesday.BEARISH SENTIMENTMore puts have been bought than call options that would gain value when futures prices fall and implied yields rise. That is especially the case in the March contract where the put-to-call ratio of 1.23 suggests bearish sentiment on 10-year Treasury note futures.Put premiums, or the price of the options contract, are also more expensive than those on calls, with a ratio of 1.69 in favor of puts.”A 10-year yield of 5% is not our forecast, but I don’t think it’s outside the realm of possibility that we can get there,” said Jan Nevruzi, U.S. rates strategist at TD Securities in New York, citing Trump’s policies and the Federal Reserve indicating it could pause its rate-cutting cycle.”With the shift higher in rates, we have seen trading around options that are close to the 5% yield. It certainly is a psychological barrier that people will look to trade around.”In the swaptions market, the implied volatility of one-month options on 10-year swap rates had increased to 24.06 basis points (bps) on Thursday, from 20.89 bps on Dec. 12, signaling expectations of increased activity on this maturity in the short term. Rate swaps, which typically track Treasuries, measure the cost of exchanging fixed-rate cash flows for floating-rate ones, or vice versa. They are used by investors to hedge interest rate risk.Volatility is a key input in the price of an option. The higher the volatility, the greater the uncertainty over a given period.As volatility climbs, there are bets on a move higher in 10-year swap rates in a month by paying for so-called “high payer strikes” of about 25 bps more on 10-year options, analysts said. It’s a gamble that 10-year swap rates will be 25 bps higher in a month, and is likely because 10-year Treasury yields will probably increase as well. Current 10-year swap rates are 4.18%.The cost of that 25-basis-point strike climbed to 23.13 bps on Thursday, from 20.8 bps on Dec. 12, when it fell to a roughly five-month low.”The implied volatility on swaptions is skewed toward higher rates,” said Amrut Nashikkar, managing director of fixed income strategy at Barclays (LON:BARC) in New York. “What that tells you is that there is demand for positioning against higher rates and there is a risk premium people are willing to pay to buy protection against a move higher.” More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Some 700,000 British households face a jump in mortgage costs when their fixed-rate deals end in 2025, as upheaval in the UK financial markets over recent weeks threatens to drive borrowing costs higher. Mortgage rates had been projected to fall this year, easing the pain for homeowners. But the recent sell-off in the UK government debt markets, driven by worries over persistent inflation and heavy public borrowing, could keep borrowing costs higher for longer. That shift has also caused swap rates, which are closely tracked by lenders to price their mortgages, to rise sharply.Two-year sterling interest rate swaps, which anticipate the average interest rate over 24 months, have risen from just under 4 per cent in mid-September to more than 4.5 per cent. The mortgage shock awaiting families this year comes on top of the 2.4mn households that had to remortgage at higher rates in 2023 and 2024, according to analysis by property group Savills. Lucian Cook, head of residential research at Savills, said the “pressure on household finances” from rising mortgage costs “has the impact of continuing to suck money out of the economy”. The vast majority of UK homeowners fix their mortgage rate for two or five years, meaning the shock of the big rise in borrowing costs that started in 2022 — and ramped up after Liz Truss’s disastrous “mini-Budget” — has hit households over several years. Rising mortgage payments have been a key contributor to the cost of living crisis. Higher interest rates will add £1.27bn to the annual housing costs for property owners remortgaging in 2025, Savills projects.These estimates are based on forecasts that predict remortgage rates will fall to 4.0 per cent by the end of the year. But investors have grown increasingly concerned about government debt, sticky inflation and the prospects for the UK economy, which over the past few weeks has driven up government borrowing costs and swap rates. Simon Gammon, managing partner at Knight Frank Finance, said: “Swaps have moved materially so pricing pressure is already there for all lenders . . . if the current trend continues with swaps remaining high, we will probably see mortgage rates move higher across the board.” The Bank of England, which last year started to cut its benchmark interest rate from a 16-year high, has warned that the “full impact of higher interest rates has not yet passed through to all mortgagors”. The central bank said in November that the typical owner-occupier reaching the end of a fixed rate in the next two years would see their monthly payments increase 22 per cent, or £146. The share of households who are behind or heavily burdened by mortgage payments remains low by historical standards, the BoE added. The need to absorb higher costs has led many homeowners to put off moving house, with fewer people able to trade up to a more expensive home. Cook at Savills said that “only when this has fully washed through . . . will you see people think again about moving”. There should be some good news for borrowers remortgaging two-year fixed deals, however. They fixed at close to the recent peak of borrowing costs and will largely see their monthly costs fall. Of the just over 1mn fixed-rate deals ending in 2025, some 340,000 will be two-year fixes where borrowers will typically save money by remortgaging. The rest were longer fixes where remortgaging would be more expensive, Savills said. Additional reporting by Ian Smith More

STOCKHOLM (Reuters) – Elon Musk’s expected hosting of Alice Weidel, leader of the far-right Alternative for Germany (AfD) party, for a discussion on his X platform on Thursday was being watched by the European Commission to check for any spreading of misinformation before next month’s German election.The European Union’s Digital Services Act (DSA) is intended to address illegal content such as hate speech and intentional manipulation to influence elections.X has been under investigation under the DSA since 2023 over suspected dissemination of illegal content and the effectiveness of its measures to combat information manipulation.HOW IS MUSK INVOLVED IN EUROPEAN POLITICS?Since publicly supporting Donald Trump to become U.S. president last year, Musk has endorsed Britain’s right-wing Reform party as well as the AfD on X.”The traditional political parties in Germany have utterly failed the people. AfD is the only hope for Germany,” he posted on X last month.Musk’s endorsement of the AfD, an anti-immigration, anti-Islamic party designated as right-wing-extremist by German security services, has caused consternation in Berlin, where all other parties rule out working with a party they regard as dangerous and undemocratic.After a Saudi doctor killed five people in a Christmas market last month in the German city of Magdeburg, Musk called German Chancellor Olaf Scholz an “incompetent fool” on X and urged him to resign.WHAT IS THE EU’S DIGITAL SERVICES ACT?The DSA regulates big online platforms such as X and Meta (NASDAQ:META) with more than 45 million users per month in the European Union, as well as the app stores of companies such as Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOGL). Its main goal is to prevent illegal and harmful online activities and the spread of misinformation. Musk’s X was the first company to be investigated under DSA for illegal content, in December 2023.A company can be fined up to 6% of its global annual turnover for breaching the DSA, and up to 5% of daily worldwide turnover for each day of delay in complying with remedies.If the infringement persists and causes serious harm to users, the Commission can request suspension of the service. The Commission has also opened proceedings against Meta and China’s AliExpress, Temu and TikTok. All the cases including that against X are still open except for one against TikTok, closed after the video sharing platform addressed EU concerns. WHAT WILL REGULATORS DO ON THURSDAY?About 150 EU staff are responsible for enforcing the DSA, both at the Commission’s DG CONNECT department in Brussels and the European Centre for Algorithmic Transparency in Spain. Former EU industry commissioner Thierry Breton reminded Weidel on X about DSA rules intended to protect democracy around elections.Senior EU officials acknowledge the challenge presented by Musk but insist the DSA is up to the job.”Mr Musk is free to express his opinions in the EU online and offline, within legal boundaries,” said Michael McGrath, European commissioner for democracy, justice, the rule of law and consumer protection.HOW HAS MUSK CLASHED WITH THE EU?The EU and Musk have clashed several times since he took over his social media platform, then called Twitter.Before Musk interviewed Trump last August, Breton urged him to comply with EU law as the livestream would be accessible in the EU. X CEO Linda Yaccarino called the letter an “unprecedented attempt to stretch a law intended to apply in Europe to political activities in the US”. The EU has accused X of deceiving users with its blue checkmark, which previously indicated that an account had been verified as belonging to a public figure but was changed to designate a paid subscriber.Musk threatened litigation, and accused the Commission, without providing evidence, of offering X an illegal secret deal to censor speech. Breton denied this.The commission has also accused X of failing to provide easy access to searchable and reliable information about advertisements, and blocking researchers from accessing its public data. More