Inflation worries severely hit U.S. bonds: BlackRocks widowmaker ETF hits a 22-year low, and the market downturn leads to soaring hedging costs.

Concerns about inflation sticking around continue to impact fixed-income investment portfolios, leading to a collapse in long-term U.S. Treasury bonds and causing a popular exchange-traded fund (ETF) under BlackRock to drop to its lowest level in over twenty years. The iShares 20+ Year Treasury Bond ETF (TLT) reached its lowest point since 2004 on Friday, even dipping below its lows during the global financial crisis. This ETF has fallen by more than 50% from its historical high in 2020, experiencing a decline greater than any previous instance. This fundhumorously dubbed the "widowmaker" by some industry insidershas been a favored tool for investors looking to capitalize on the bond sell-off, but as yields continue to rise and fund values decline, many dip buyers are experiencing significant losses. TLT's total assets peaked at over $60 billion in 2024, but with a long-awaited rebound failing to materialize, assets have now fallen back to $41 billion. On Friday, the yield on the 30-year U.S. Treasury bond rose to 5.28%, its highest level since 2007. This followed the Federal Reserve's decision to keep interest rates unchanged on Wednesday, which triggered a wave of selling as investors feared that Fed Chair Kevin Walsh might be unable to control inflation, which has been above the Fed's target for five consecutive years. Meanwhile, as the impact of this week's Fed policy meeting continues to resonate through the rates market, bond traders are paying the highest premiums since March to hedge against further rises in long-term bond yields. Concerns that the Fed might not act quickly enough to curb inflation have driven the 30-year U.S. Treasury bond yield to its highest level since 2007 in recent days, with costs to hedge against larger losses also increasing: the premium of put options over call options (measured by the 1-month 25-delta skew implied volatility index) has reached its highest level in about five months. Investors are hedging the risks of 10-year and 30-year Treasuries through a variety of options structures centered around September-maturing U.S. Treasuries. This positioning indicates that they are concerned that if worries about inflation persist, interest rate volatility will intensify. Despite recent rises in yields, the ICE BofA MOVE Index, which serves as a volatility indicator for the U.S. Treasury market, remains relatively subdued. On Friday, U.S. Treasury prices weakened once again as long-term bond yields continued to rise, echoing increases in oil and European bonds. Fund flows on Friday indicated that investors anticipated a rise in 10-year Treasury yields to around 4.8%, approximately 10 basis points higher than current levels. Investors are growing increasingly worried that Fed Chair Kevin Walsh may not be able to control inflation, which has been above the central bank's target for five consecutive years. On Wednesday, a large buyer of long-term U.S. Treasury put options paid about $20 million in premiums to hedge against the possibility of 30-year Treasury yields rising to around 5.3%. This week, the Fed held interest rates steady for the seventh consecutive month. The purchase price for this option ranged between 23 and 37 basis points but surged to 75 basis points on Friday. Since the Fed meeting, there has been a substantial inflow of option funds targeting a yield of up to 4.9% for the 10-year Treasury yield and up to 5.42% for the 30-year Treasury yield, slightly below the peaks observed in 2007.