Rates are gravity

Warren Buffett said interest rates do to asset prices what gravity does to matter. Right now the options market is signaling things could get a lot heavier.

“Interest rates are to asset prices what gravity is to matter.”

Meet the TLT

The iShares 20+ Year Treasury Bond ETF holds only the long end. Its shortest maturity runs to February 2046, its longest to August 2056.

No credit risk, sure

The U.S. repays in dollars it can create, so the odds of a true default are effectively nil. On that point, Khouw agrees with the optimists.

But rate risk is real

When rates rise, bond prices fall. The longer the maturity, the harder the fall, which is exactly what makes 30-year paper so twitchy.

“The longer the maturity, the greater the sensitivity to interest rate changes.”

A 52% lesson

From late 2020 through late 2023, TLT dropped about 52%. Coupons barely softened the blow because those coupons were tiny to begin with.

The range just broke

Thirty-year yields sat inside their Q4 2023 range for two years, then pushed decisively above the highs. They added another 7.6 basis points in a single session.

Puts flooded in

TLT traded about 1.6 million option contracts on Thursday, nearly double its average. The 856,750 puts were roughly 3.3 times normal volume.

A $1.8 million wager

Someone bought 65,000 October 80/79 put spreads at $0.275 each. It pays better than 2.6 to 1 if TLT slides $1.78 in 35 days, a move it just made in two days.