I am looking at a leveraged play in TLT which would put me in hot water if rates go higher than 7%.
As per TLT webpage(there is a price yield calculator in this page if you scroll down), TLT price will drop to 60 if yield goes to 7.4%. Since my plan involves using all my capital to buy TLT covered call(buy write) and sell another put at the same strike as the call. I am planning to sell both calls and puts ATM, say at 89, as per approximate calculation my margin will hold up until 60 at which point I will have to arrange more funds. They allow 75% of TLT value to be used for selling options.
As per my estimates if rates go higher than 6%, banks will be in severe trouble, so will be many companies like AT&T, Verizon, etc. with high debt, who need to roll their debt frequently. That will lead to layoffs and asset deflation which itself should slow down inflation and make the Fed intervene and hold rates right there by doing QE(use balance sheet to absorb excess supply until market calms down). In other words even if rates have to be bumped up to 6% due to higher inflation, Fed will hold the rate there, even if inflation is trending higher, since economy will slow down significantly due to the negative effects of higher rates, which will bring inflation expectations down.
I feel like there is 90% chance rates will not go higher than 6%. That said there is 10% chance of supply shock like it happened in late 70s where OPEC decides to keep cutting oil supply and oil goes to $150 or higher per barrel. IMO, Fed won't have to hold rates higher at that point to reduce consumption , gas price going higher will be enough to stop consumption along with lower consumer spending.
Now I am convinced that there is 95% chance that rates will not go higher than 7%, do you guys agree with this analysis?
https://www.ishares.com/us/products/239454/ishares-20-year-treasury-bond-etf
