The Treasury fired a monetary weapon straight at the bond market on Wednesday. Bonds took the hit and kept selling anyway.
That single act of defiance sets up what could be one of the greatest trades of this decade.
Here’s the sequence. The Treasury announced it would support liquidity and buy the long end of the curve, which forces 30 year rates lower.
It worked for exactly one day. Rates dropped from 5.3 to 5.2, then rallied right back the following session.
The bond vigilantes are loose. These rates simply do not care.
You have to go back roughly two decades to find 30 year rates this high. The 10 year is pressing 4.75 and sits within a tenth of a point of its highs.
That 10 year matters more than anything on your screen. It sets your mortgage, and it’s about to break out.
The Fed is pulling the opposite direction. Fed Watch prices near a 40% chance of a hike in September, a coin flip in October, and better than 70% by December.
So the Treasury pushes the long end down while the Fed lifts the short end. That’s how you flatten a curve and walk the economy into stagflation.
Here’s where the money is. If bonds keep selling off next week and slide toward 107 or 106, I want to sell puts with impunity.
The Treasury and the Fed cannot let the long end run away from them. They’d be forced into yield curve control, because Washington can’t roll its debt at these levels.
I’ve said that word “impunity” maybe twice in my career. This is one of those times.
Now shift over to stocks. We’re closing right around 7,700, which puts us on the upper cusp of the volatility box.
The gravity point sits at 7,511. Once price gets pulled inside that range, accumulated open interest drags it back to the center.
Here’s what I broke down in today’s weekend update:
- The bond put trade sits in the 105 strike about 63 days out, trading near 41 ticks. Max profit is $640 on a one lot, and this is a trade you load the gills on if bonds cooperate.
- The volatility box tops near 7,700 with a gravity point at 7,511. Any move lower from here opens a 200 point pull to the downside against 100 to 150 points of upside.
- This week priced an $82 expected move. The S&P 500 closed outside it on a move just over $100.
- Next week prices about $100. That’s a 20% bump in short duration volatility while the VIX stays blind to every option inside nine days to expiration.
The VIX cannot see the risk sitting in front of it. Rotations have killed correlation, and volatility never moves without correlation.
Traders sell semiconductors, then buy Microsoft. They dump Walmart, then load Target. The tape stays locked up while real risk builds.
The dollar got torn apart this week. Gold ripped, silver went on a run, and crypto exploded from 64,000 to 78,000 on what looks like a short squeeze.
I’d rather sell bond puts than guess where the dollar lands. Everything else is noise until those rates settle.
