Skepticism Ramps Up as iShares 20+ Year Treasury Bond ETF (TLT) Bounces

Despite growing skepticism, the iShares 20+ Year Treasury Bond ETF (TLT) has bounced since putting in a post-Fed bottom in mid-December

Jan 17, 2017 at 2:40 PM
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The iShares 20+ Year Treasury Bond ETF (TLT) sold off in the wake of Donald Trump's surprising win in the early November U.S. presidential election. However, since bottoming in the $116-$117 neighborhood after the Fed raised interest rates in mid-December, the exchange-traded fund (ETF) -- which mirrors the price action in U.S. Treasury bonds with a maturity of at least 20 years -- reversed course, bouncing near the site of its June/July 2015 lows. And while TLT is up more than 2.6% in 2017 to trade at $122.27, pessimism toward the ETF has been growing, suggesting the shares' recent rebound could have room to run.

Taking a closer look at TLT's technical backdrop shows the ETF is now trading north of its 20-day moving average. More recently, the shares overtook their 50-day moving average -- a trendline that served as a ceiling during a late-September rally attempt. Moreover, according to Schaeffer's Senior V.P. of Research Todd Salamone, TLT's mid-December bottom held north of $114.90, which is 0.8 times the July 2016 all-time peak at $143.62.

tlt daily since june 2016

Despite this show of short-term strength, skepticism toward bonds has been ramping up. For starters, BofA-Merrill Lynch recently showed its highest five-week outflow in bond funds in the past 15 years, according to Schaeffer's Senior Equity Analyst Joe Bell, CMT. Plus, per, net outflows on TLT hit $1 billion from the post-election Nov. 11-Dec. 31 period.

This pessimism is seen in the most recent Commitment of Traders (CoT) report, too, which showed a record-breaking net short position on the 10-year Treasury note. Additionally, short interest on TLT has ballooned more than 82% since hitting a roughly seven-year low in April. Such elevated levels of bearish betting, combined with TLT's recent bounce, may explain why call open interest recently pulled ahead of put open interest on the ETF for the first time since late June.

As of Friday's close, 913,161 calls were currently open on TLT, in the 96th percentile of its annual range, compared to 734,660 puts, in the middling 48th percentile of its 12-month range. And with peak call open interest of 110,854 contracts docked at the out-of-the-money February 126 strike -- due to massive bets placed in late December -- it's likely some of these shorted players have been looking to hedge their bearish bond bets via long call purchases.

Nevertheless, it's likely that put options will have a bigger impact on TLT's near-term price action, versus calls. Specifically, the underfoot 120 and 122 strikes are home to roughly 60,000 contracts collectively outstanding in the standard monthly January series. This could provide an options-related foothold for TLT, as the hedges related to these bearish bets unwind over the next week.

Meanwhile, now appears to be an opportune time to purchase premium on TLT's near-term options, with both Bell and Salamone noting that implied volatility on the ETF has declined since its early November/early December peaks. In fact, TLT's Schaeffer's Volatility Index (SVI) of 13% ranks lower than 78% of all comparable readings taken in the past year -- meaning low volatility expectations are currently being priced into the iShares 20+ Year Treasury Bond ETF (TLT) short-term options.

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