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While the S&P 500 Index (SPX) is moving to multi-year highs, Treasury Bonds have been under pressure and yields are rising. The iShares Barclays 20+ Year Treasury Bond Fund (NYSEARCA:TLT - 121.68), which is an exchange-traded fund (ETF) that represents ownership in a basket of government bonds that mature in 20+ years -- is down $1.87 today and has given up nearly 8% from the record highs seen less than two months ago.

Investors have been shifting money out of safe-haven investments and into riskier assets. The move is taking a toll on bonds and, given the big rise in the TLT in recent years, there is ample room for shares to fall in the weeks/months ahead. Is it time to bet against bonds?

Follow the Flow

Options volume on the iShares Long-term Bond Fund is well above average today. The largest options trade in TLT is a spread, in which 33,000 in-the-money September 124 puts were apparently sold on the bond fund to open a new position in 48,500 October 122 puts.

This massive spread in TLT today appears to roll positions opened in late August, which included buyers of September 124 puts for $1.84 per contract when TLT was trading near $125. They’re banking the profit nine days before the September expiration and opening a new position in October puts that expires in 37 days.

TLT option chain, spread detail

Open interest (OI) in the September 124 puts on TLT is 42,226 contracts and the largest OI position in the bond ETF. 40,930 contracts have traded today and so it appears that the bulk of these options are being closed out. At the same time, more than 60,000 Oct 122 puts have traded against 2,211 in open interest. So the activity in the October term looks like fresh positions and, if so, the action will create the largest block of OI in TLT. Moreover, today’s massive spread and rolling to October at-the-money puts seems to express the view that further losses in Treasury bonds is likely over the next five and a half weeks.

Flight From Safety

An improved macro-economic outlook and diminishing worries about the European Debt Crisis are probably the biggest factors driving the recent weakness in Treasury bonds and it is affecting more than just bonds. The euro recaptured 1.29 against the dollar today for the first time in five months. The SPX is trading at its best levels since early September of 2008. In addition, there’s been a substantial decline in the correlation among individual companies reflected in the CBOE S&P Correlation Index (ICJ). (Click the chart below to enlarge).

Daily Chart of the CBOE S&P Correlation Index

The ICJ is an index that measures the amount of correlation or co-movement among the individual components of the S&P 500. It tends to move higher when macro-economic headlines are driving market action and investors are buying and selling entire asset classes. ICJ falls when there is less co-movement among the shares of individual companies. A substantial drop in the index is a sign that investors are leaning more towards corporate news and scrutinizing the merits of individual companies, rather than the entire equity asset class. ICJ normally stays between 75 to 50. It has plummeted to roughly 55 from about 75 a few months ago, suggesting the nature of the market action has changed dramatically since the Spring.

Headline Risk

The news media remains fixated on events in Europe. Those fears have permeated and affected investor sentiment for years now. Yet, while the concerns persist, the tale of the tape is telling a different story. Investors are moving out of safe-haven investments and into riskier assets. By most measures, market volatility is easing. There is less correlation among individual stocks as more focus shifts to domestic and corporate news rather than fears about another debt debacle in Europe. In this environment, the move out of safe-haven investments is in full swing and it might indeed be the right time to follow the smart money trade in TLT today -- bet against bonds.

As senior analyst for, Fred provides regular notes and daily updates on interesting trading activity and advanced option topics.

Disclaimer: The views represented on this blog are those of the individual authors only, and do not necessarily represent the views of Schaeffer's Investment Research.

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