The Nasdaq-listed iShares 20+ Year Treasury Bond ETF (TLT) has fallen sharply and is nearing a significant region of support based on our SpotGamma EquityHub model. The decline in the TLT has been fueled by soaring interest rates across the Treasury yield curve as the Fed pledges to raise rates to bring inflation down.
The decline in the TLT also appears to be hitting a level of exhaustion on a technical basis. It points to a critical support region that could lead to a bounce if it holds. However, if that bounce fails to materialize, buyers of the TLT may want to be patient to see where it ultimately settles out before jumping into it.
The TLT Is Responding to Macro Forces
High inflation rates are driving the Fed to raise rates aggressively. While the Fed mainly controls the front of the yield curve. The back of the yield curve, which is the part the TLT represents, also responds as shorter-dated maturities rise. The rising Treasury yields on longer-dated maturities have sent the TLT lower in 2022.
The SpotGamma Model Shows Support at $100
Our equity hub model shows a build-up of option gamma at $100; we call this region the put wall. The put wall is the strike price with the largest net negative Gamma in an underlying stock, ETF, or index. The put wall can also act as a level where put owners may begin to sell their open put options. When a customer buys a put, the customer buys that put from a market maker. As a result, the market maker is short the put, which is equivalent to long shares of the TLT, and the market maker will hedge this exposure by going short the TLT. This is critical because when the customer comes back to sell the put option, the market maker is forced to unwind their hedges, causing these market makers to become buyers of the TLT. This is why knowing the price of the put wall is essential because it becomes a support level for the TLT.
Technical Support
Additionally, from a technical perspective, the ETF has fallen to a zone of support between $98 and $101. These levels are associated with a time in 2011 and 2014 that acted as technical resistance and support. The relative strength index has fallen to just 26, which is a very oversold reading.
Waiting For a Bounce
If the put wall fails to offer support due to broader macro forces, it should serve as a cautionary sign to investors to be patient and wait to see where TLT settles and stabilize before jumping into it.
While macro forces will be the ultimate driver of where TLT goes next, the $100 level could be a telling sign of what to expect.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.