We just witnessed the worst week for long bonds in 10 years. The iShares 20+ Year Treasury ETF (NASDAQ:TLT) was down -7.33% (-7.51% intra-day) for the week ending November 11th. Looking back 10 years, the 2nd worst week for long bonds was a -5.78% drop during the week ending January 23rd, 2009. The third worst week was lower by -5.29%.
Below is the data I am referring to. There are a couple different observations to note.
- The 2nd and 3rd worst weeks for long bonds were not met with any relief 1 to 8 weeks afterwards.
- The following week was up 78% of the time, but this falls to a coin flip thereafter.
- The worst return 2 weeks later was -5.01%, and the best was 6.49%.
- Average return for each time period is actually positive.
Going through charts to try and determine what to make of this, I turned to a ratio chart. This is the S&P 500 measured by the SPDR S&P 500 ETF (NYSEARCA:SPY), versus the iShares 20+ Year Treasury ETF or $TLT. The chart is striking as we are fast approaching all-time highs in the pair (3% away). The bull inside of me wants this pair to break out as that would give me confidence that we may be entering a new phase of the equity bull market. However, breaking out to all-time highs after a massive run won’t be an easy task. This leads me to think that a solid risk return trade could be a long $TLT and short $SPY. The beauty of it is that the stop loss is only 2-3% away, making this favorable from a risk standpoint.
I think this is interesting to watch as it relates to the overall bull market, as a potential opportunity, and simply wanted to share that with you.
Note that I am not currently in the trade and this is NOT a recommendation for that purpose. Thanks for reading.
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.