How the Fed’s Latest Comments Impacted This Treasury Bond ETF


Subscribers to Chart of the week received this comment on Sunday, September 11.

Around this time last year, my colleague covered the iShares 20+ Year Treasury Bond ETF (TLT), via a Bloomberg article about famed short seller Michael Burry, who made a name for himself betting against, and ultimately calling, the housing bubble. Burry’s fund bought $280 million in put options against TLT and within months the ETF suffered a sharp sell-off.

Since that aforementioned sale, TLT has experienced a significant long-term pullback. Investors have been able to buy and sell long-term US Treasury Bonds via ETFs in the market for about 20 years, so now is a good time to dig deeper into the iShares 20+ Year Treasury Bond ETF, and more specifically, what was the main catalyst. behind recent and long-term equity volatility.

Many of these catalysts seem obvious, including the property market crash of 2008 and the long-term credit rating fallout of 2011. on the Treasury market. In fact, the short-lived push above 1% became an extreme example of volatility, with the ETF finding some stability by June 2021.

Now, the 200-day average daily lag hit 1% for the first time in more than two years earlier this summer, in response to recent buzz around inflation rates from the US Federal Reserve. As Wall Street continues to watch hawkish comments from the Fed closely, volatility looks imminent in the near term.

To get a more technical perspective, it looks like calls have been favored over puts over the past two weeks. This matches the ETF’s 10-day buy/sell volume ratio of 1.87 on the International Securities Exchange (ISE), Cboe Options Exchange (CBOE) and NASDAQ OMX PHLX (PHLX), which ranks in the 92nd annual percentile.

Echoing this, Schaeffer’s Open Put/Call Interest Ratio (SOIR) of 0.43 is above just 19% of the yearly readings. This means that short term options traders have rarely been more call oriented.

Short-term interest has also increased, up more than 16% over the last reporting period. This represents 8% of the stock’s total free float and it would only take a day for short sellers to redeem these bearish bets.

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