TLTW: A Short-Term Hedge Against Rising Yields

The iShares 20+ Year Treasury Bond BuyWrite Strategy ETF (TLTW) is being considered as a short-to-medium term hedge against rising yields. Although it would not be held as a "buy & hold" investment, it is preferred over the iShares 20+ Year Treasury Bond ETF (TLT) due to its potential benefits.

The iShares 20+ Year Treasury Bond BuyWrite Strategy ETF (TLTW) is being increasingly considered as a short-to-medium term hedge against rising yields. While it is not intended to be a long-term "buy & hold" investment, TLTW is currently preferred over the iShares 20+ Year Treasury Bond ETF (TLT) due to its unique construction and potential benefits.

TLTW strictly follows the CBOE TLT 2% OTM Buywrite Index (USD), which involves buying the iShares 20+ Year Treasury Bond ETF (TLT) and selling call options with a 2% out-of-the-money (OTM) strike. This strategy allows TLTW to generate income through the distribution of capital when the underlying TLT price exceeds the call strike. The 16.54% distribution yield provides a significant return, but the cap on TLT’s upside movement ensures that TLTW does not participate in large price increases.

The current economic environment favors TLTW. The unemployment rate has dropped to 4.12%, Fed Funds Futures are pricing in a 375–400 bps range, and the S&P 500 P/Es are above the 80th percentile. This combination of factors suggests a balance between supply and demand for Treasuries, which can support TLTW’s premium and keep TLT below its strike price.

However, TLTW is not without risks. The probability of a rate cut within TLT’s duration horizon (15–20 years) is higher than what the market is currently pricing in. If a rate cut occurs, TLTW’s convexity of -30.46 would lead to underperformance compared to TLT due to the weight of the 2% cap from the monthly option rolling. Additionally, if implied volatility declines, the premium of the sold call options could shrink, reducing TLTW’s overall return.

In conclusion, while TLTW offers a unique strategy to hedge against rising yields, it is not suitable for a long-term buy & hold strategy. Its strategy is best used as a short-to-medium term hedge in the current macroeconomic context. Investors should monitor rate expectations and implied volatility to make informed decisions about their TLTW holdings.

References:
[1] https://www.ainvest.com/news/uk-gilt-yields-siege-fiscal-uncertainty-case-inverse-bond-etfs-2507/
[2] https://seekingalpha.com/article/4799688-tltw-etf-attractive-short-medium-term-hedge-against-rising-yields