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Big Bet Against Bonds

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A large spread trade was opened in the ProShares UltraShort Bond Fund (TBT) Monday. The exchange-traded fund, which is designed to move inverse to the iShares Long-term Treasury Bond ETF (TLT), was up $0.59 to $61.64 on the day and the new position seems to be targeting a possible move to $100 through early-2014. If so, the leveraged play is expressing concerns that bonds might fall sharply, yields will rise, through the remainder of 2013.

TBT is not only the inverse to the TLT, but it is leveraged and moves twice as much as TLT. According to ProShares, "This Short ProShares ETF seeks a return that is -2x the return of an index or other benchmark (target) for a single day, as measured from one NAV calculation to the next." For instance, TLT is down 0.3% to $120.30 per share Tuesday morning and TBT is up 0.6% to $62.

In options action, an investor made a substantial bet against bonds Monday and opened a hefty 1x2 call ratio spread in TBT. In this strategy, 8,000 January 90 calls were bought on the ETF for $0.54 and 16,000 January 100 calls sold at $0.28. $0.02 was collected on the 1x2 and, if shares hold below $90 and the position is left open through the expiration, the investor pockets the credit. On the other hand, if shares rally north of $90, the trade begins to make money. The max payoff potential is $10 if TBT settles at $100 at the expiration, or a 61.3% surge above current levels. At that point, the 90s are worth $10 and the 100s expire worthless. There is additional risk to the upside due to the fact that not all of the 100s-strike calls (which are sold) are covered by the 90s.


Since TBT moves inverse to Treasury bond prices, it moves higher along with yields. Buying a Jan 90 - 100 (1x2) call ratio spread would hedge the risk of a dramatic decline in long-term Treasury bonds and a major spike in yields. Obviously, since long-term yields have an important impact on economic activity and also set other rates, like some mortgages, such a dramatic spike would have important implications for, not just holders of long-term Treasury bonds, but the entire global economy.

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