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Unwinding the blue wave trade: Put volume in Treasury ETF reaches year high

Published 11/04/2020, 05:39 PM
Updated 11/04/2020, 06:25 PM
© Reuters. Democratic presidential candidate Joe Biden campaigns in Florida
TLT
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By Kate Duguid and April Joyner

NEW YORK (Reuters) - A major bet on a Democratic "blue wave" sweep of the U.S. presidency and both houses of Congress was being unwound on Wednesday, as traders pulled out of bearish bets that long-dated Treasury yields would rise.

Volume in put options on the iShares 20+ Year Treasury Bond ETF (O:TLT), the exchange-traded fund that tracks longer-dated Treasury bonds, reached its highest since June 2019 on Wednesday, according to data from options analytics provider Trade Alert.

The brisk volume reflected investors exiting bets on rising Treasury yields as the Democratic drive to win control of the Senate in Tuesday's U.S. election appeared to be falling short, although the party's candidate Joe Biden was leading Republican President Donald Trump in some critical battleground states.

"Most of the flow we are seeing today is investors closing put spreads they likely had on for a blue wave," said Chris Murphy, the co-head of derivatives strategy at Susquehanna International Group. 

Treasury yields climbed to multi-month highs ahead of the election as investors anticipated a Democratic sweep of the White House and Congress - and massive fiscal stimulus along with it. As those chances faded on Wednesday, yields plummeted - which Tradeweb said was likely to be the largest post-election rally since 2000.

TLT rose by 2.17% on Wednesday, last trading at $161.08, its highest since mid-October. Bond prices move inversely to yields.

While a divided Congress is still likely to pass a coronavirus stimulus bill, investors said the amount may be smaller than was expected if there had been a broad Democratic victory.

As traders exited positions staked on rising rates, however, they did not replace them with bets that rates would fall, Murphy noted. Other indicators suggested that investors did not expect a major counter-swing in TLT.

© Reuters. Democratic presidential candidate Joe Biden campaigns in Florida

Near-term implied volatility for TLT fell from 18.5% to 13% on Wednesday, which Murphy said could indicate the ETF's movements will be more range-bound going forward.

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