U.S. Treasury yields steady before this week's supply

LONDON (Reuters) -Treasury yields were broadly steady on Tuesday as the prospect of supply this week offset a boost in demand for Treasuries from weaker-than-expected jobs data.

U.S. 10-year government bond yields were flat at 2.05 percent and 30-year yields were little changed at 3.20 percent with the U.S. Treasury scheduled to sell 10-year notes on Wednesday and 30-year paper on Thursday.

"You have got supply, so if anything that supply is going to weigh on the market. It's real duration that is coming into this market," said a trader.

At 2.05 percent, 10-year yields still hovered close to four-week lows hit on Monday. Yields fell as far as 2.019 percent that day after U.S. jobs data came in below expectations last week, casting doubt over the strength of the U.S. economic recovery.

Friday's U.S. non-farm payrolls report showed just 120,000 jobs were added during March, far below the market's median expectation of 203,000 and helping to revive speculation of further quantitative easing by the Federal Reserve. Treasuries did not fully react to the data last week as the market was only open for half a day during the Good Friday holiday.

Societe Generale expected the 10-year Treasury yield to break below the 2.019/2.031 percent support area and decline to at least the tentative rising support line coming at 1.851 percent.

But others in the market said yields could remain around current levels until they get further evidence of economic weakness or additional insight into the Fed's thinking on more monetary stimulus.

"Markets had become maybe a bit too optimistic and had written off more monetary easing too early," Philip Marey, strategist at Rabobank said. "If we get a couple of bad non-farm payrolls in a row, I think it would be interesting for the Fed to start sterilized asset purchases."

Dallas Fed President Richard Fisher, an outspoken policy hawk, told Reuters in March he had not heard U.S. monetary policymakers discuss the possible introduction of a "sterilized" bond-buying program, where it seeks to counter any inflationary impact, as was suggested by a report in the Wall Street Journal that month.

Before the jobs data, market participants had interpreted recent Fed comments and improved data to mean the bar for further monetary stimulus was extremely high.

(Reporting by Ana Nicolaci da Costa; Editing by Ruth Pitchford)

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Option traders bet longer-dated bond yields will rise

By Doris Frankel

(Reuters) - Option players appear to be betting on higher U.S. Treasury yields as Federal Reserve policymakers appear less likely to add more monetary stimulus to keep short term interest rates low.

Options volume this week was heavily tilted in favor of put options in the iShares Barclays 20+ Year Treasury Bond fund, (PSE:TLT - News) or TLT while call turnover increased in the Proshares UltraShort 20+ Year Treasury Fund (PSE:TBT - News). The activity in both suggest that investors are positioning for higher long-dated yields.

Minutes from the Federal Reserve's March policy meeting released Tuesday suggested fewer Fed policymakers felt the need for more bond purchases soon to bolster the U.S. economy than back in January. This led to a broad market sell-off on Wall Street with prices of the 30-year Treasury bond falling more than one full point.

On Thursday, 30-year Treasury prices gained 19/32 to drop the yield to 3.32 percent. The yield on the 30-year closed at 3.48 percent on March 19, which was the highest since September 2011.

"We have seen a lot of put buying on TLT and call buying on TBT," said Joe Bell, senior equity analyst at options research firm Schaeffer's Investment Research.

"This may be due to expectations that interest rates could be raised sooner rather than later," Bell said. "It also could be speculation that the prices of 20-year Treasuries have reached a top and will decline from here."

This week 307,000 puts and 92,000 calls have changed hands in the TLT while 283,000 calls and 45,000 puts traded in the TBT, according to options analytics firm Trade Alert.

The TLT is an exchange-traded fund that tracks the long end of the Treasury yield curve. Investors often use equity puts, allowing them to sell the shares at a fixed price any time up until expiration, to guard against downside market risk.

In this case, when TLT fund loses value, bond prices are falling and yields are rising. So buying a put on the TLT is another way to bet on higher long-term rates.

Shares of the TLT rose 0.71 percent to $112.91 and its option turnover consisted of 61,000 puts and 23,000 calls.

By contrast, the TBT is an ETF that gains when long-term Treasury bonds fall. The TBT's daily performance is intended to double the opposite of Barclays Capital 20+ Year U.S. Treasury Bond Index, which tracks the daily return of long-term Treasuries.

The fund moves 2 times the inverse to TLT, thus buying a call - a contract which conveys the right to buy shares at a fixed price - is a bearish view on bonds. The TBT ended Thursday at $20.09, down 30 cents.

Joe Cusick, senior market analyst at online brokerage OptionsXpress, noticed that on Thursday an investor bought a block of 21,400 June $110 puts on the TLT for $2.42 per contract. "The hefty premium purchase, of more than $5 million, seems to reflect concerns about weakness in TLT," he said.

"Since the fund holds a basket of longer-term Treasury bonds, the put purchase seems to express the view that prices will fall and yields will rise," he said.

On Wednesday, Cusick also highlighted the trading of big put spreads in the TLT, notably the July $95-$100 put spreads.

Later on Wednesday, a big call spread traded in the TBT. An investor bought 52,000 April $21-$23 TBT call spreads for 31 cents looking for the fund to rise to $23 or better by April expiration in two weeks, said WhatsTrading.com options strategist Frederic Ruffy.

Ruffy said "while the spread appears to be an aggressive short-term bet against TreasurysTreasuries, it's possibly a position adjustment." More than 60,000 contracts traded in both strikes and open interest was sufficient to cover.

Over the 10 trading sessions ended on Wednesday, investors bought nearly three times more puts than calls in the TLT on three U.S. options exchanges as fresh positions, according to Schaeffer's Investment Research. This put-to-call ratio is higher than 98 percent of the readings taken over the past year.

In the TBT, the 10-day call-to-put ratio was 9.78 calls for every put bought, Schaeffer's data showed.

(Reporting By Doris Frankel)

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