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We are opening a new bearish trade on the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT). Long-term Treasuries have been stuck in a wide consolidation range for most of 2018. On one side of the tug-o-war, you have investors who believe the positive economic numbers the United States has enjoyed this year are going continue.
They also believe that this trend is going to lead to increased inflation and higher long-term yields as the Federal Open Market Committee (FOMC) continues to raise short-term rates while the yield curve remains relatively steep as investors sell Treasuries.
On the other side of the tug-o-war, you have investors who are concerned about the bearish impact they believe tariffs and trade wars are ultimately going to have on the U.S. economy and that investors are going to move more of their money into the safe-haven of U.S. Treasuries, which will push the price of Treasuries higher and yields lower. We anticipate the first group is going to be correct in the short term.
Long-term Treasury prices have hit a solid resistance level in 2018. Looking at the chart of TLT below, you can see that resistance was drifting slowly higher during the first part of the year, but it seems to have peaked in July at $123. Since that time, TLT has formed a lower-low in early August and a lower-high in late August as the S&P 500 has finally been able to break up to new all-time highs.
This suggests that traders are gaining increased confidence in equities and are likely to start shifting a larger portion of their portfolios from bonds, like long-term U.S. Treasuries, to equities. This change in asset allocation likely won’t have enough of an impact to break TLT out of its longer-term consolidation range, but it should be enough to send the fund down toward the bottom of the range in the next few weeks. We are looking for TLT to drop back down toward support at $118.
Buy to open the TLT October 19th $119 Put (TLT181019P00119000) for a maximum price of $1.22.
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