Bond Volatility is Still Cheap But the HV is Not

Argentina devalued the peso today, along with China providing less than stellar manufacturing data.  It all added up to a mad dash for Treasuries and other safe havens like the Euro.  What a difference a year makes.   It was not too long ago that the run to above 3% in T-bills was a sure thing.  At least, over the last few weeks coming into 2014 that is not the case.

Speculation on bonds is tough when folks start to look for the protection of the dollar.  After all, TLT ($107.22, up 0.43) was in the $120’s for quite a while last year while the Fed looked set to make an exit.  The steady march to 3% was the theme through the 2nd half of 2013.  What the market is not pricing now is the jump in realized volatility.

graph courtesy of Livevol (r)

I have TLT up 1.4% on what is pretty bland news overall.  Besides Argentina equities not much has changed going into the FOMC meeting next week except the bond realized vol. has picked up.  The IV on the options however has barely moved.  To me that is mis-priced as in the short term IV is pricing the long term certainty that bonds won’t move.  There should be a trade there.

The Trade

I think buying the TLT ATM straddle in the Feb 7 Weekly straddle with pay after the FOMC meeting.  In the meantime, some other random event might occur.  Think to close by next Thursday unless you get a runner.