Why Ending QE Does Not Guarantee a Profitable Treasury Put Trade
Summary
The response cautions that an expected end to quantitative easing does not automatically imply falling Treasury futures prices or a profitable long put position. If a policy change is widely anticipated, markets may already reflect it. The author also points to a prior selloff during taper discussions followed by a bond rally, and notes that weaker growth after policy tightening could support bonds instead.
The argument challenges the assumption that the Federal Reserve directly controls longer-term yields, citing a historical period when short rates rose while longer Treasuries rallied. It also emphasizes carry: a short Treasury position must overcome the rate move already embedded in forward yields, and options add time decay. These are qualitative cautions supported by historical examples and yield figures stated in the original discussion, not a current trade recommendation or a full options valuation. The analysis depends on the market conditions and date described, and does not quantify the proposed LEAP puts’ premium, volatility, or payoff.
Key ideas
- An anticipated policy change may already be reflected in Treasury prices.
- Ending QE could coincide with weaker growth that supports bond prices.
- Federal Reserve policy does not determine longer-term yields in a simple, reliable way.
- Negative carry and option time decay can undermine a bearish Treasury position.
Tags
Full text
# When Fed stops QE, Treasury Futures will go down in price, so... LEAP Puts are a good idea? # When Fed stops QE, Treasury Futures will go down in price, so... LEAP Puts are a good idea? I think: when Fed stops QE (Quantitative Easing), Treasury Futures prices will go down. Question 1: Am I right? So... buying LEAP Puts (in Treasury Futures) would be a good idea. Question 2: Am I right? ## Answer by Helin (score 13, accepted) https://quant.stackexchange.com/a/14591 Not saying this trade won't work, but there's certainly no guarantee that it will... - Given that QE will stop in October is well teleported at this point and has been expected since last year, you'd think this should be fully priced in. - Last year, when the "tapering" talk started, Treasuries did sell off quite a bit, but has since rallied all the way back. Clearly, QE is not a major factor driving interest rate markets nowadays. - There's always the chance that stopping QE and other accommodative monetary policies would have negative impact on the economic growth, causing bonds to rally further. - Despite what some people might believe, it's not clear the Fed has that much power controlling longer maturity yields. In 2004-2005, when the Fed was hiking, 10y notes were busy rallying. - Shorting Treasuries is a terribly negative carry trade. As of Friday, 10-year yield was about 2.35%, while 1y forward 10y par yield was about 2.73%. So for the next year, 10y yields have to sell off by at least 38bp for you to make money (i.e., you can still lose money even if interest rates are higher!) It's even worse for 2s, a fully 100bp of rate increase has already been priced in. Since you're using options, you'd also be bleeding time carry, etc.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.