Exchange-traded fund investors are preparing for the possibility that peak bond pain has passed.
Open interest for bullish call contracts is close to an all-time high for the $24 billion iShares 20+ Year Treasury Bond ETF (ticker TLT), while the fund’s put-call ratio is at the lowest since 2003. It’s a similar story for the $32 billion iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), where call open interest is also hovering near record highs while the ratio of bearish puts to calls has dropped to the lowest level in a year.
The positioning suggests traders see an end to a brutal selloff which has taken yields on the longest-dated Treasuries to the loftiest heights in over a decade. The extent of those losses across the fixed-income spectrum, paired with the Federal Reserve’s commitment to getting a grip on the hottest inflation in four decades, has likely enticed some investors to wager on a rebound.
“The risk-reward is becoming a bit more two-directional,” said Sameer Samana, Wells Fargo Investment Institute’s senior global market strategist. “At 4%, especially on the long end, I’m sure there are some people who can make the case that the next 100 basis points could just as easily be lower as higher.”
