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Options traders see more volatility for longer-term U.S. bonds after yield surge

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By Saqib Iqbal Ahmed and Kate Duguid

NEW YORK, March 18 (Reuters) - Traders expect longer-term U.S. government bonds to remain volatile after a recent rise in yields, options data showed on Thursday, while there were little sign of a let-up in bearish bets in longer-dated Treasury futures.

The yield on the U.S. 10-year Treasury note on Thursday rose above 1.75% for the first time in 14 months after central bank policymakers pledged to keep their foot on the gas despite an expected surge of inflation.

For the $15 billion iShares 20+ Year Treasury Bond ETF (TLT) , the 30-day implied volatility - a measure of how much traders expect the longer-term government bonds to gyrate - rose by more than 1 percentage point to 18.4%. That's higher than this measure has been about 86% of the time over the last year, data from options analytics firm Trade Alert showed.

"The options market is expressing a view that TLT could be in for further near-term volatility," said Christopher Murphy, co-head of derivatives strategy at Susquehanna Financial Group.

The ICE BofA MOVE Index, which tracks traders' expectations of swings in the Treasury market, was close to the highest it has been in about a year.

The bond market sell-off has left TLT shares down about 15% for the year and the fund has seen net outflows of about $1.86 billion for this year, Lipper data through March 10 showed. TLT shares were down about 1% on Thursday.

"The momentum right now is in the hands of the shorts," said Andrew Brenner, head of international fixed income at NatAlliance Securities.

Speculators remain significantly short longer-dated Treasury futures, recent data from the U.S. Commodity Futures Trading Commission showed - which is a bet that yields will rise.

Brenner said that commodity trading advisers (CTAs) - firms that trade in futures contracts, commodity options and/or swaps - were "fully maxed out" on their bets while traders had also bought "a lot of Treasury puts which is another thing that’s pushing markets down" referring to Treasury futures.

Still it's not all one-way.

On Wednesday, the trading volume in TLT calls, typically used for bullish bets, outpaced that in bearish puts 1.4-to-1, a possible sign investors are also concerned about volatility to the upside, Susquehanna's Murphy said. (Reporting by Saqib Iqbal Ahmed and Kate Duguid; editing by Megan Davies and Jonathan Oatis)