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Bonds Bid as Stocks Fade on MRNA News and Walmart Earnings

Bonds Bid as Stocks Fade on MRNA News and Walmart Earnings

In an environment where the Federal Reserve is expanding its balance sheet at unprecedented levels, it can be hard to understand the fundamentals of movement. This is particularly true of U.S. Treasury bonds. However, the Fed began tapering some of its Treasury bond purchases at the end of April, which may allow for more market forces to be present and movements to be more hinged on fundamentals.

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  • The difficult thing as you look at the Fed’s balance sheet expanding by over $2 trillion is what inflation expectations should be. Many onlookers might be calling for hyperinflation. However, hyperinflation is where complete faith in a currency is lost. The issue is that with so much debt imploding, is there an immediate outlook for inflation or deflation. If you consider that 8.8% of mortgages are in forbearance, it adds perspective to the uphill climb the Fed faces.

    As a result, the market may be more poised for a bearish and deflationary shock than an inflationary one. This outlook helps the price of long-term bonds like the 30-year U.S. Treasury bond. The iShares 20+ year Treasury Bond ETF (TLT) is a fund that tracks the price performance of this part of the yield curve.

    On Tuesday, the price of TLT began to rally following the price testing the previous low near $162. The price closed near the high of the session as the broad market faded. Earlier in the trading session, there was a large bullish trade being placed on TLT in the options market. There were 5,000 contracts of the 17 JUL 20 175/185 long call vertical bought. This is a bullish bet that TLT will be $185 by July’s expiration.

    Option traders may want to consider a similar trade as a potential hedge against a larger decline in the market and other potential forces that may drive long-term Treasury yields lower. The 17 JUL 20 175/185 can be bought for around $0.70. This gives a max gain of $930 or over 1300% ROR is the price of TLT is $185 or higher by expiration.

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