(Bloomberg) — 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 (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.”
Yields on 30-year Treasuries pierced 4% this month after entering 2022 below 2%, dragging total returns on TLT down nearly 33% year-to-date. The magnitude of that selloff also rocked duration-sensitive corporate bonds, with LQD more than 22% lower on a total-return basis so far this year.
Despite the drawdowns, investors have continued to shovel cash into the ETFs. TLT has garnered nearly $12.6 billion in 2022, while LQD has taken in about $2.7 billion.
While investors are eager to time the bottom in bonds, those dip-buyers will get burned if the Fed’s historically aggressive campaign of interest-rate hikes fails to prevent persistent inflation, Samana said.
“If it’s difficult to get back below 3% to 4%, it would be hard to make the case for 4% long rates,” Samana said. “At least, the case that they represent value or any real return.”
