In the US, options traders bet on a decline in the long-term government bond ETF
In the United States, options market traders actively traded contracts betting on a decline in the iShares 20+ Year Treasury Bond ETF (TLT), which seeks to track an index of US government bonds. As CNBC Top News reports, according to author Michael Khouw, this activity reflects a bet on a further rise in long-term interest rates in the United States.
The shortest maturity of bonds in TLT's portfolio falls in February 2046, while the longest falls in August 2056. The author notes that investors in US government bonds face not only credit risk but also interest-rate risk: when rates rise, bond prices fall. The longer a security's maturity, the more strongly its price reacts to changes in rates.
Long-term rate dynamics
After long-term rates began rising in 2020, TLT fell by 52% from the second half of 2020 through the end of 2023. Total return, including coupon payments, was somewhat better, but low coupons only partially offset the fund's decline in value.
Since then, yields on 30-year US Treasury bonds have mostly fluctuated within the highs and lows of the fourth quarter of 2023. Over the past several weeks, they have decisively exceeded the 2023 highs, and on the day discussed in the article, they rose by another 7.6 basis points.
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Options market activity
On Thursday, 1.6 million options contracts were traded in TLT, nearly twice the average daily volume. The number of put options totaled 856,750, 3.3 times the average figure. The most actively traded contract was the October $79-strike put option: 123,649 contracts were traded at an average price of $0.4786 per contract.
One of the largest trades was an October put spread with $80 and $79 strikes: a net premium of $0.275 was paid for each of the 65,000 spreads. The value of this position was nearly $1.8 million. According to the author's calculation, it implies that by October expiration TLT must fall below $80 by at least the amount of the premium paid. The fund closed at $80.78 after hitting an intraday 52-week low of $80.665.
Khouw estimates that the position could generate more than $2.6 in potential payout for every dollar at risk if TLT falls to $79 or lower by October expiration. For this to happen, the fund needed to decline by $1.78 in 35 days—approximately as much as it changed from its high on Tuesday morning to its low on Thursday afternoon.
