One of the more popular and consensus trades last year in the Treasury market was the yield curve steepener. With this position, traders were long the 2-Year Notes on the bet the FOMC would cut rates aggressively, and short 10-Year Notes on the concern that continued fiscal expenditure would lead to more inflationary concerns down the road. Through the Liberation Day in April, this trade worked very well as you can see in the top chart that the yield curve steepened from below 20 basis points spread to almost 70 basis points spread. However, over the rest of the year, this trade became frustrating and many traders started to unwind. From May until the end of the year, while the logic for the steepener made sense, the trade was really stuck in a range. That is, until the end of the year. In the last two weeks of the year and into the new year, the yield curve has started to steepen again. If I take a step back and see how the curve looks over a long period of time, I can see there is scope for a much wider spread should the steepening continue. The first stop may come in at the confluence of the trendline that stretches back to 2014, and the 50% Fibonacci retracement of the move in the curve from the 2010 highs to the 2023 lows. This comes in at 92 basis points, another 20 basis points higher than here.

Putting the move in U.S. Treasuries in a global context, I can see that U.S. yields were the outlier last year in moving lower. The counterparts in Japan and Germany moved higher over the year and finished 2025 at or near the highest levels in the last 5 years. With this context, is there potential for higher U.S. yields to match the move in the other developed markets? Could this come in the new year as global asset allocators are comparing investment options in the major developed markets and potentially see more appealing opportunities in markets outside the U.S.?

Simply from a yield perspective, having broken through one trend line, the next stop is likely from the January and May 2025 highs which comes in at 4.3%. What does that mean in the futures markets, though? For this, I turn to the Ultra 10-Year Treasury Note, which is celebrating its tenth anniversary this year. The Ultra was designed to provide traders with precise exposure to the 10-year point on the U.S. Treasury yield curve. It was introduced in 2016 to meet market demand for a futures product that more closely tracks the benchmark "on-the-run" (most recently issued) 10-Year Treasury Note, which is a key reference for interest rates globally. If I look at the generic front month contract on the daily Ichimoku chart, I see that futures are breaking down below the cloud. In addition, the lagging span is breaking lower too, suggesting the trend is about to change for these futures, which have gone sideways for the past few months. The consolidation pattern is resolving with a move lower as the bears assert control over the market. With futures now at 114-25, could this point to a move to 114 or lower over the coming few weeks?

The big concern in the bond market going into last year, which still persists this year, is the amount of debt the U.S. government must issue to fund the operations. Last year, the government chose to issue more in bills than in coupons, as the total issuance for 2025 only came in at 3.8 trillion, only slightly above the amount for 2024. If I look at the expectation for 2026, I see that in the first 4 months of the year, there is an expectation of 1.27 trillion which annualizes to 3.8 trillion, the same as the last two years. Could the U.S. government choose to issue more further out of the curve to give U.S. yields that are lower than peers? Will the U.S. government need to issue more because it is unable to come to any resolution to cut spending? It appears that the market may be too sanguine when it comes to coupon issuance in the coming year.

Turning to the volatility markets, it is time to see if the options are pricing in any potential moves or dislocations. The first stop is to look at the CVOL index which measures implied volatility across strikes and expirations The 10-Year CVOL Index comes in around 4 which is the lowest level of the past 3 years. Yes, markets are coming out of a holiday period when implied volatility is traditionally lower; however, even compared to the holiday periods of the last two years, implied volatility levels look quite low. Then I look at the skew which tells me the amount of premium for downside options vs. upside options or vice versa. I can see this line in purple is near 0, which tells me traders are showing neither a preference for upside or downside options. All in all, the implied volatility markets are demonstrating a fair amount of complacency for a market that is starting to break out from a consolidation pattern. Could this present opportunity?

Putting the ideas together, it is now time to turn to the QuikStrike Spreadbuilder and put together an options trade. Directionally, the trade should be bearish because many factors are pointing to higher yields: 1. Yield curve steepness 2. Higher global bond yields 3. Treasury issuance 4. Technical move to the trendline 5. Futures break lower out of a consolidation pattern. While it is not entirely clear this will be a high volatility move, given implied volatility is at the lowest levels in the last three years and there is no bias in options skew, I should not be afraid to spend some premium. Finally, it is worth looking at Weekly options because they have just set a new record in average daily open interest of over 1M contracts. In this example, I chose the TN5F6 contract to give me more time for the idea to play out, but a trader can choose any expiration and use a similar idea. The option trade is a split strike put butterfly buying the 114.75 puts, selling two of the 114 puts and buying the 113.50 puts. The strikes are not asymmetric, so if the move continues to the downside, traders will still make some profit, albeit smaller, but doubling their money. The maximum profit occurs if futures move lower over the next few weeks and stop at the 114 strike. This would net almost a 4 to 1 gain on the premium spent. The risk for traders is futures sit or move higher, not moving below the 114.75 level in which case they would lose the premium paid.

With futures contracts that allow traders to pinpoint the 10-year part of the curve and liquid Weekly options contracts that provide the flexibility to customize a view, traders can benefit in looking at the Ultra 10-Year Treasury Note contracts at CME Group.

Good luck trading!

The opinions and statements contained in the commentary on this page do not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs. This content has been produced by [Data Resource Technology]. CME Group has not had any input into the content and neither CME Group nor its affiliates shall be responsible or liable for the same.

CME GROUP DOES NOT REPRESENT THAT ANY MATERIAL OR INFORMATION CONTAINED HEREIN IS APPROPRIATE FOR USE OR PERMITTED IN ANY JURISDICTION OR COUNTRY WHERE SUCH USE OR DISTRIBUTION WOULD BE CONTRARY TO ANY APPLICABLE LAW OR REGULATION.