The largest Treasury ETF became a source of intense — and I’ll eschew the temptation to call it “amusement” — fascination in 2023 amid a drawdown that exceeded 50% during the most recent escalation in a historic three-year selloff for US government bonds.
The product is the go-to vehicle for fighting the Fed, where that means dip-buying at the long-end on the assumption that, eventually, “it has to work” (as Eric Balchunas, Bloomberg’s ETF guru, half-joked earlier this month).
If nothing else, the Fed will tighten the economy into a recession and the long-end will rally. And that’s if some geopolitical landmine or other shock doesn’t trigger a safe-haven bid first. Or at least that’s the narrative.
So far, though, it’s just a falling knife. And people are eager to try and catch it. “Can’t stop won’t stop,” Balchunas wrote Wednesday, on social media, flagging a huge $1.2 billion inflow to the product, the second-largest of 2023.
That brought the MTD October inflow to $3.2 billion. YTD, it’s $20 billion, a record by a country mile.
On Tuesday, more than a third of all call option volume in the product was tied to just one trade: A 42,599-contract $88/$93/$98 call butterfly with a November 17 expiration.
That was notable. On Wednesday, Nomura’s Charlie McElligott flagged it. “The $93 level in TLT corresponds to a rate of ~4.5%, and the trade would make ~$19 million net at that level,” he said, calling that “pretty attractive payout leverage.”
And yet, as McElligott went on to say, “bonds still can’t hold a squeeze.” “There simply aren’t enough buyers of duration versus current supply realities and QT impacts into perpetually higher fiscal deficit spending,” he said.
Even so, Charlie noted that “the murmurs are getting louder” around the possibility that Treasury could surprise markets by tilting issuance more heavily towards bills in an effort to mitigate the supply overhang that continues to weigh on psychology at the besieged long-end of the Treasury curve.
That’s not the base case. But it’s a possibility.
