A notable shift occurred in the U.S. Treasury bond market as options traders began positioning for a potential bottom in the ongoing bond sell-off, following a robust 10-year note auction. On Wednesday, trading in the iShares 20+ Year Treasury Bond ETF (TLT) was heavily skewed toward calls, with nearly 370,000 calls bought compared to under 100,000 puts, and more puts sold than bought. This call-heavy activity, with volume 50% above the 30-day average, suggests traders are increasingly betting on a rally in TLT, which would correspond to a decline in yields. The most popular trade for the monthly October 30 expiry was the 82-strike call, a 10-cent contract that traded about 16,000 times, requiring long bonds to recover all losses since September 22, when TLT dropped 6% and the 30-year yield surpassed 5.6% [1].
A single aggressive buyer was responsible for a significant portion of this activity, spending at least $250,000 on 25,000 of the 82-strike calls expiring October 16 and 30, as well as 5,000 of the 80-strike calls expiring October 30. These trades, while not massive in dollar terms, represented the largest purchase of any contracts for month-end expiry and occurred just before the 10-year auction that triggered a strong rally in bonds [1].
Jim Perry, founder and chief investment officer of Perry International Capital Partners, commented on the auction, stating, "Tens had a bullet bid today – auction demand has been very strong. Demand is strong. It was 'fill my market order at market prices because I want them.'" Perry also noted, "Yields may be topping out," but expressed a preference for equities, saying, "I would rather own stocks. If yields fall, stocks will outperform bonds" [1].
The optimism in the bond market was mirrored in the rate-sensitive utility sector. On Friday, instead of the persistent put-buying seen in the Utilities Select Sector SPDR Fund (XLU) over the past month, trading was dominated by a $1 million put sale, signaling expectations that the sector's sell-off may be ending or reversing. Utilities have risen about 3% since then. On Wednesday, call-selling was prominent in XLU, but put-buying remained minimal, with only $1 million of the $12 million in premium exchanged tied to calls [1].
Another key test for the bond market is anticipated with the auction of 30-year bonds scheduled for 1 p.m. ET today [1].
CONCLUSION
Options traders are increasingly positioning for a bottom in the U.S. Treasury bond market, as evidenced by heavy call activity in TLT and strong demand at the 10-year auction. While some analysts see yields topping out, there is a preference for equities if yields decline. The upcoming 30-year bond auction will provide further insight into market sentiment.