Option probabilities spell possible trouble for Treasuries

O

OddTrader

Option probabilities spell possible trouble for Treasuries

http://www.futuresmag.com/2013/11/15/option-probabilities-spell-possible-trouble-for-tr?t=options
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The incredible rally in equities in 2013 has begun to stir concern among many that the stock market is now in a bubble. We have entered the euphoric stage of this bull market and equity prices cannot and will not go lower according to some talking heads in the financial punditry.

While chatter is starting to heat up that equities are in a bubble, the real bubble seems to be ignored for the most part. The larger, more concerning bubble is in the Treasury marketplace where the Federal Reserve continues to print money to purchase treasury bonds to help keep interest rates artificially low.

Instead of debating the bubbles in Treasury’s versus equities, or trying to predict when the bubble in either asset class may pop, I want to focus on the near term for price action expectations in longer-dated Treasury bonds.

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Hmm, I might be missing smth, but did the author of this article forget the dividends? The ATM fwd for Mar 2014 expiry would appear to be quite a bit lower than spot px, which, at the very least, would make the calculations different.

Not that I doubt the conclusion that there be skew... After all, us carry munkies need protection.
 
This is hardly news to most people.

When the Fed finally does taper the 85 billion a month in 'QE' the widely expected result will be a rise in interest rates and a concomitant decline in bond prices. ( i.e. a rise in volatility for treasuries).

When is that currently expected: The end of the first quarter in 2014. That's April I believe.

Everybody knows that.
 
Quote from oldnemesis:
This is hardly news to most people.

When the Fed finally does taper the 85 billion a month in 'QE' the widely expected result will be a rise in interest rates and a concomitant decline in bond prices. ( i.e. a rise in volatility for treasuries).

When is that currently expected: The end of the first quarter in 2014. That's April I believe.

Everybody knows that.
More...
The most common view is Mar 14 start for taper, although the odds of Dec start have risen recently...

It's not entirely clear how much is already priced in, which means that rates might not rise that much, once taper is announced.

Moreover, the author of the article seems to have forgotten the all-important "risk-neutral" bit when describing the mkt's expectations.
 
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