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.
Bonds are going on tilt, according to Mike Khouw, and investors are taking notice. The iShares 20+ Year Treasury Bond ETF, known as TLT, has seen significant activity in its options market, with traders betting that long‑term interest rates will rise, causing bond prices to fall.
Bond Market Volatility
The TLT fund tracks an index of U.S. Treasury bonds whose maturities span roughly 20 to 30 years. Although Treasurys are widely regarded as the safest asset class, they remain vulnerable to rate risk— the inverse relationship between rising interest rates and falling bond prices. A bond’s price sensitivity to rate changes grows with its maturity, making longer‑dated issues especially reactive.
Interest Rate Risk
Investors learned this lesson painfully when long‑term rates began climbing in 2020. From the second half of 2020 through late 2023, TLT shed about 52 percent. Coupon payments softened the total‑return hit only marginally because the yields were very low. Since that period, 30‑year Treasury yields have mostly traded within a narrow band, but recent weeks saw them break above the highs recorded in the fourth quarter of 2023. On Thursday, TLT options volume reached roughly 1.6 million contracts, nearly twice the typical daily average, with put activity surging.
Options Trading Activity
The most heavily traded contract was the October 79 put, attracting 123,649 contracts at an average price of $0.4786 each. A notable trade involved the October 80/79 put spread, where 65,000 contracts exchanged hands for a net debit of $0.275 per spread— a position valued at almost $1.8 million that bets TLT will slip below the $80 strike by at least the premium paid. Participants wagering on a TLT decline are effectively betting that long‑term rates will keep climbing.
Implications of Rising Rates
Higher long‑term rates would increase borrowing costs for the housing market and other sectors that rely on extended‑term financing, with the U.S. government itself being the largest borrower. Even if rates eventually level off, the current spread offers a payoff better than 2.6 to 1 should TLT fall to $79 or lower by the October expiration—a $1.78 drop in just 35 days. For context, TLT moved that amount between Tuesday morning’s highs and Thursday afternoon’s lows.
Conclusion
The options market is pricing in pronounced volatility for long‑dated Treasury bonds. While many view U.S. Treasurys as free of credit risk, they remain exposed to rate risk, which intensifies as yields rise and longer maturities react more sharply. Warren Buffett once said interest rates are to asset prices what gravity is to matter. If the options market’s view proves accurate, bond investors could face a heavy correction.
Source: CNBC · 2026-09-11