The minutes were released on Wednesday detailing the Federal Reserve’s June policy meeting, with mixed emotions leading the iShares 20+ Year Treasury Bond ETF (ARCA:TLT) to remain range-bound. Policymakers “generally agreed” that monthly bond purchases would end in October, with a final reduction of $15 billion in monthly purchases of U.S. Treasuries and mortgage-backed securities.
Fear that equity markets were running a little “hot,” however, kept a bid under Treasury bonds. The minutes stated that some Fed policymakers were concerned investors may be growing too complacent about the economic outlook and the central bank should be on the lookout for excessive risk-taking. The iPath S&P 500 VIX ST Futures ETN (ARCA:VXX) is trading at record lows, while equity markets continue to push higher, making the Fed’s concerns valid.
The chart below shows that TLT has been trading between 110 and 114 since May, and has yet to make a solid move either higher or lower, even as a bevy of economic data and policy decisions have come out the past few months. A reduction in stimulus has failed to ignite selling in Treasury bonds, causing investors to ultimately wait out the final verdict.
When prices do break either higher or lower, it would create a solid option spread opportunity. Pressure continues to build as long as prices stay within their current range. If prices break higher, choose a 116-119 call spread to gain exposure. Similarly, if prices make a significant move lower a 110-107 put spread would gain exposure to the downside.
Treasury bonds remain an interesting play considering all of the forces affecting prices right now, when the market finally decides on a direction, make sure you are prepared to jump on board and ride it out.
