Long end US Treasury yields have been in a downtrend for a LONG time.
Investors made a lot of money buying these bonds and gaining on capital as the yields headed lower (inverse relation between bond price and yields).
With 30yr @ 1.46% now (was as high as 3% in Jan 2019), how can one play this instrument? Given that Fed is trying to avoid negative rates, how low can 30yr go from here?
For the past 1 month, 30yr has been in the range of 1.322%-1.524%, so clearly it is closer to top end of the trading range in a long term downtrend (current yield 1.462%).
To be long Treasuries and yet not block a lot of capital in the trade, I have put on a Call Butterfly on $TLT 160/170/180 for Nov monthly expiry.
Assuming the 30yrs stick to the previous month’s range, price range of TLT should be roughly between 161.34-167.58 (-1.2% to +2.65%), current price of 163.26.
With elections around the corner, it is possible that there will be a flight to safety, even if it is momentary. This provides an opportunity for making 10%-20% in couple of weeks time.
Risk: Sudden spike in yields and/or change in market growth/inflation expectations.
You can check out this link to get a primer on Butterfly spreads.
Disclosure: I have a position on this trade.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: This is not investment advice, please do your research before committing capital.