Options on U.S. Treasuries reached the most expensive in more than a year relative to equities, reflecting bets that monetary tightening from the Federal Reserve will generate bigger price swings in government bonds.
Implied volatility on the iShares 20+ Year Treasury Bond ETF last week touched the highest since August 2013 compared with the SPDR S&P 500 ETF Trust, according to data on one-month contracts compiled by Bloomberg. Since the start of 2014, the cost of options on the bond ETF has exceeded that of its stock counterpart less than one-third of of the time.
With the Fed scheduled to wind down its bond purchases in October, the market is now setting its sights on the first lending rate increase, forecast to come in 2015. Whether investors are betting on economic strength that would justify monetary tightening, or simply looking to hedge existing positions, government debt is the most exposed to the Fed?s decision, according to Anthony Valeri of LPL Financial Corp.
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