Bonds are going on tilt. How to play them, says Mike Khouw
Warren Buffett once said interest rates are to asset prices what gravity is to matter. If the options market is correct, things could get heavy, says Mike Khouw.
TL;DR
- Warren Buffett's analogy: interest rates are to asset prices what gravity is to matter.
- The TLT ETF, tracking 20+ year U.S. Treasury bonds, has seen a substantial increase in options trading volume, particularly put contracts.
- Bond prices fall when interest rates rise; longer maturity bonds are more sensitive to rate changes (rate risk).
- TLT fell approximately 52% from late 2020 through late 2023 as long-term interest rates rose.
- 30-year U.S. Treasury rates recently broke above 2023 highs, leading to increased options activity.
- A significant options trade involved a put spread betting on TLT falling below $80 by October expiration.
- A bet on TLT falling implies a bet on long-term rates rising, which impacts borrowers, including the U.S. government.