Chart of the Day – $TLT: Bond Villains

by Dan March 3, 2015 3:28 pm • Chart of the Day• Commentary

Back on Jan 13th I had the following to say about the near term demand for U.S. Treasuries when the TLT (iShares 20 yr bond etf) was $133.50 (TLT: No Mr. Bond, I Expect You To Die):

It is our sense that the U.S. Treasury rally is getting long in the tooth, despite the growing uncertainty in global growth, the surge in the dollar, the crash in industrial commodities and the erratic behavior by a growing number of central banks.  It’s our view that we could be near a period of moderation of Treasury bond demand as we get closer to the ECB’s much anticipated January 22nd meeting and likely decision to get into the QE game.  And I’ll take it a step further, with the next FOMC meeting on Jan 28th, I doubt there will be too many surprises from last weeks minutes of the December meeting, but following meeting on March 18th could be the one where the Fed strikes a more hawkish tone If in the meantime we were to get a continuation of better jobs data (with some wage growth) here in the U.S., improving manufacturing data, stabilization of  commodity prices and the slightest bit of inflation, the talk prior to the March meeting will once again turn to how soon the Fed can raise.

Looking back now, we got the nod from Draghi on QE, but it seems that while the Fed has attempted to remain dovish, the market is not taking them at face value.  This Thursday we will possibly get some specifics on the ECB’s impending asset purchases, on Friday we will get the Feb’s Job report, and then in two weeks on March 18th we will see if the Fed removes the word “patient” from their rate guidance text.  So I stick with the Jan comments, ECB QE should moderate demand for U.S. Treasuries in a stable geo-political environment and a hot jobs number with wage inflation should suggest that the Fed statement in a couple weeks read a tad more hawkish, and if that all happens that U.S. Treasuries go lower in the near term.

Since the end of the “Taper Tantrum” in late 2013, the TLT has been in a very steady uptrend as a combination of geopolitical tensions Ukraine, a generally weak global economy, particularly emerging markets, EuroZone instability and uncertainty as to the health of our own recovery with the Fed’s unwavering commitment to ZIRP had kept U.S. Treasuries in demand.

The near parabolic move in January (the one that shook me out of my bearish trade at my stop, read here) is stating to look a lot like a blow-off top:

TLT 2yr chart from Bloomberg
TLT 2yr chart from Bloomberg

The real test will be the TLT’s ability to hold the uptrend in the coming days/weeks, which is down about 2% from current levels. Depending on Friday’s data, the TLT could be an aggressive press on the short side, or a good scoop from a near term oversold condition at support.

Given the volatility in an instrument like the TLT who’s underlying is not exactly expected to be that volatile, options prices are very elevated in the TLT, trading a couple points from the recent multi-year highs:

TLT 1yr chart of 30 day at the money IV from Bloomberg
TLT 1yr chart of 30 day at the money IV from Bloomberg

Given the elevated vol we may consider calendars in an effort to sell short dated high IV and help finance longer dated directional views.

Oh and as for my bearish trade in Jan, I should know by now that James Bond won’t die if you explain your entire evil plan and then don’t stick around until the death blow is inflicted.

My Bad.