Options traders start calling bottom on bond rout after 'bullet bid' 10-year auction

• Nine of the top 10 most-traded TLT contracts were calls, with the most popular trade being the 82-strike call expiring Oct. 30, which traded 16,000 times. One aggressive buyer spent at least $250,000 on call options shortly before a strong 10-year Treasury auction.
• The TLT had dropped 6% since September 22, with the 30-year yield passing 5.6%, but traders are now betting on a recovery in bond prices (decline in yields) through bullish options positioning.
• Rate-sensitive utility sector options showed similar optimism, with someone selling $1 million in puts on Friday. Utilities have since risen about 3%, with reduced put-buying activity indicating fading bearish sentiment.

Market Summary: Treasury Bond Options Signal Potential Bottom

Key Developments

Options traders are betting that the U.S. Treasury bond sell-off may be nearing its bottom, following a strong 10-year note auction that sparked a bond rally. Trading activity in the iShares 20+ Year Treasury Bond ETF (TLT) showed pronounced bullish sentiment, with nine of the top 10 most-traded contracts being calls.

Significant Trades

A major buyer spent at least $250,000 purchasing call options, including:

• 25,000 contracts of 82-strike calls expiring October 16 and 30
• 5,000 contracts of 80-strike calls expiring October 30

The most popular trade was the 82-strike call (10-cent contract), which traded approximately 16,000 times. This strike price requires long bonds to recover all losses since September 22, when TLT dropped 6% and the 30-year yield surpassed 5.6%.

Market Context

The 10-year Treasury auction received what traders described as a "bullet bid," with strong demand suggesting investors urgently wanted exposure. According to Jim Perry of Perry International Capital Partners, buyers were placing "market orders at market prices because I want them."

A critical test followed with the 30-year bond auction at 1 p.m. ET.

Sector Implications

The bullish bond sentiment extends to rate-sensitive sectors. The utilities sector (XLU ETF) showed optimistic trading, with $1 million in puts sold on Friday. Utilities have gained approximately 3% since then.

Outlook

While yields may be topping out, some analysts prefer equities, noting that if yields fall, stocks will likely outperform bonds. The shift from persistent bearish positioning to bullish bets suggests growing conviction that the bond rout is exhausted.