(Bloomberg). — According to one of the largest Treasury options market players, the bond selloff which pushed Treasury yields up to their highest level in two years might not result in a complete taper tantrum.

Bets in the options market suggest yields won’t go far above current levels, with investors positioned for the 10-year yield to rise modestly to 1.9% in the near term, despite hawkish Federal Reserve minutes last week, said Harm Backx, a trader at Optiver Holding BV in Amsterdam. After data from Friday’s U.S. job market showed mixed results, bearish bets lost momentum.

Wage growth exceeded expectations and unemployment declined, but payrolls increased less than half what was expected. After the Fed announced its intention to accelerate monetary tightening in order to reduce inflation, yields rose to 1.8% last Wednesday. This was the highest level since January 2020.

“People are definitely still putting on bearish plays, but not for crazy scenarios,” Backx said in an interview. “The market actually acted very reasonably around the FOMC minutes and not panicky at all. Investors were less interested in betting on yields rising after we released the payroll figures. Some people are reversing their bearish bets.”

Because so much is at stake, the pace of bond repricing concerns markets. Even though yields have not increased significantly in the past, they are low enough to cause ripple effects across stocks, credit cards, mortgages, and other commodities. The broad Treasuries Index has seen a 1.6% drop in January after an extremely difficult start to 2022. It is higher than the 1% decrease for all of January 2021. Bloomberg’s strategists have predicted a 2.04% year-end yield for the 10-year, but the pace of change may challenge this number.

The expectation that the Fed will raise interest rates in March, a call which was unusually made just weeks before is rising. This comes amid indications the central bank wants to reduce stimulus to counter the growing threat of high inflation. Analysts are revising their calls, with JPMorgan Chase & Co. (NYSE:), Deutsche Bank AG (NYSE:) and Citigroup Inc (NYSE:). One of the people moving forward with rate increases is Inc (NYSE:).

Yet signs from some corners of derivatives markets don’t seem to reflect the jitters in the cash market. The ICE (NYSE 🙂 BofA MOVE Index, which shows the implied extent of Treasuries price movement in Treasuries prices — was down last week. Backx suggests that the calm in the options market could partly be due to the fact there are still many assets in price.

“We have seen decent interest in people playing a rise in yields for a few months already, for instance through buying puts and put spreads,” he said. “It tends to increase close to events such as the release of the FOMC minutes.”

Although the Treasuries market selloff was more concentrated on the back end, it is clear that the Treasuries selling has been less focused. In the end, the yield curve flattened. The 10- and 30-year yields are now lower than their shorter-dated counterparts. It is believed that Fed early moves may help to reduce prices down the line.

This view could be challenged by the U.S. government’s inflation data published Wednesday. Consensus predicts that consumer prices will increase 7.0% through December, and 0.4% over a month prior.

©2022 Bloomberg L.P.