Signal Du Jour - Short vol in TLT

Last one for 2025.

Let’s be frank; the last FOMC of 2025 was as boring and predictable as most of them this year. The Fed cut 25 bps and the market barely twitched through a press conference where even the journalists, judging by their questions, seemed unsure why they were still in the room.

Now that this is out of the way, let us focus on the final stretch before 2026. Volatility has calmed down since last month and is extremely unlikely to make a comeback, which means fewer opportunities and a simple warning: you do not have to trade.

We get it; trading feels good, and rewarding. You take a decision, and you feel both in control of your fate and completely let go of it at the same time. It is that moment at the roulette table when you have placed your bet, the ball is spinning and spinning, and anything can happen. The comparison stops there though; we do not gamble. We trade odds, and when they are not there, we step away. What is the point of giving back money so hardly earned through months of grinding.

And while yesterday we did nothing, today we are in luck with another opportunity in TLT. A trade we took early in the week with our group, and one that has been quite successful so far, because the odds were there. This may very well be our last Signal du Jour of the year. Let us cross our fingers that the ball lands on our color.

Let’s have a look.

The context

Long-term bonds have had a tumultuous year, helped along by antagonistic expectations from economists and market participants. Some expected yields to push well beyond the 4% mark, especially when inflation expectations peaked right after the start of the tariff war.

Yet despite the wildest theories, they ended the year almost exactly where they started. With that, it is fair to say it was an unusually volatile year for a product typically favored for its low volatility.

H2 was much calmer than H1, yet still a very volatile year for 2025.

Realized volatility pushed into the mid-20s in April, then calmed down in the second half of the year to settle around 9% over the past three months. This is, by the way, one of the lowest points of the year, despite the constant peregrination around what the Fed may do next. Far from us to comment on macroeconomics again, but while Q1 clearly carried the tone of a concerned market, H2 is telling a very different story. Is this because Powell’s influence at the helm of the Fed is already waning, and the market expects rates to go down, or at least gain more visibility on the rate trajectory? Careful not to be too disappointed if that does not happen in the end.

In the meantime, our realized volatility forecasts for the month ahead are broadly in line with what we have seen recently.

Realized volatility is not expecting to go crazy over the next few weeks leading to the end of the year.

Unless something truly astronomic comes out over the next few days, realized volatility in TLT over the next 30 days should settle around 10%.

With that in mind, let us have a look at what the options market is telling us, and how to structure a trade in the product.