Demand for options that protect against higher long-terminterest rates is the weakest since October, signaling to someanalysts that yields are poised to rise from close to the lowest inmore than three years.

An indicator known as the swaption skew, which traders watch fora hint of where yields are headed, hasn't been as biased towardlower rates since October. Ten-year Treasury yields reversed coursethat month, rising almost 0.5 percentage point within about threeweeks and halting a rally that followed the Federal Reserve'sSeptember decision to forgo lifting its target from near zero.Movements in swap rates tend to mirror the direction of Treasuryyields.

“The market is not pricing in higher rates right now, sothe cost of insuring against that in options is low,” indicated bythe skew, said Scott Buchta, head of fixed-income strategy at BreanCapital in New York. “I'd be counterintuitive here—and be totallyhedging for higher rates. The market is so dislocated from the Fednow with their forward rate projections.”

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