Recent economic data has been dismal, with manufacturing numbers way off pace and job growth that can only be described as anemic by even the most optimistic observer. Amidst this deluge of downbeat economic data, long-term Treasury bond prices have soared and bond yields have been pushed down to their lowest point in eight months.
On Wednesday, June 2, stock prices tanked and bond prices surged, as capital was shunted away from equities and into bonds. That caused the price of the iShares Barclays 20+ Year Treasury Bond (NYSE: TLT) — an exchange-traded fund (ETF) pegged to the long-term sector of the U.S. Treasury bond market — to surge nearly 1.4% in the session. Yet the next day, bond prices sold off sharply, with TLT suffering a 1.9% loss.
The action in TLT last week shows just how volatile bonds are right now, and that volatility has many traders betting big on either a continued bull market in bonds — or a big selloff (i.e. a spike in bond yields) waiting in the wings.
According to options trading tracking firm tradeMONSTER, there’s been big straddle action in TLT of late. The company recently reported the purchase of 10,000 TLT August 97 Calls along with an equal number of TLT August 97 Puts. This kind of straddle is designed to profit from a big move either higher or lower in TLT. But if this ETF remains little changed, both sides of this straddle will lose.
This sizeable straddle position on the volatile long-end of the yield curve highlights the kind of role bond ETFs like TLT can play for investors. With this fund, you can easily bet on the direction of bond prices. And TLT offers options trading investors plenty of liquidity and plenty of choices on which to place their bets.
If you are disinclined to buy options on TLT you can still make a bullish bet on bonds by simply buying the fund.
A bearish bet, however, on bonds, i.e. a bet that bond yields will begin to climb, can be made with another ETF pegged to the bond sector, the ProShares Short 20+ Year Treasury ETF (NYSE: TBF). This fund holds financial instruments designed to deliver the inverse daily performance of the long-end of the U.S. Treasury bond market. So, if you’re a bond bear, this is the fund for you.
As you can see by the above chart of TBF, yields have come way off their February highs, and now are down about 10% since then. In contrast, TLT has risen about 6% since falling to its February lows.
If you’re a bond bull, and you suspect that interest rates will fall and bond prices will continue moving higher, then TLT is a way to play that thesis. Conversely, if you think bond yields have basically bottomed here, and that they are ultimately headed higher, then a TBF position is where you want to be.
As of this writing, Jim Woods held no positions in the funds mentioned in this article.
