Bond Market Rally Triggers Notable Options Trades in Utilities and SOFR Futures
Traders make multi-million dollar bets that interest rates may have peaked and the bond sell-off is slowing.
Quick Look
As the U.S. bond market firmed and TLT rallied, options traders placed major bets in the Utilities Select Sector SPDR ETF and SOFR futures, suggesting the bond sell-off may be slowing and interest rates could have peaked.
AI-generated summary
Why It Matters
As bonds have fallen and driven rates higher, utility stocks have faced increased competition for payouts from fixed income.
As the U.S. bond market firmed Thursday and the iShares 20+ Year Treasury Bond ETF (TLT) posted its best intraday rally in at least a month, some less notable but equally important action for bond bulls happened in two corners of the options market.
In equities, about an hour after the opening bell on Thursday, a string of options bets in the State Street Utilities Select Sector SPDR ETF (XLU) sent options volume in the fund to 10 times the 30-day average, according to CBOE LiveVol data and SpotGamma.
It centered around a $1 million trade betting that the group stops going down or even rallies. As bonds have fallen — driving rates higher — utility stocks have been hard hit as the dividend-rich sector faces increased competition for its payouts from fixed income.
Specifically, that trader sold 5,000 of the 39-strike puts expiring in mid-January for $695,000, and an equal amount of the 42-strike calls expiring the same day for $400,000. With XLU trading just above $39 at the time of the trade, it's a bet with a maximum payout between $39 and $42 by expiry.
While the trade is not an aggressive bet on a rally in utilities, it a sign that some traders believe the sector is done falling and that rates may have topped out. Moreover, it represents the culmination of a week-long change of pace in options flows around this highly interest-rate sensitive sector, which has traded with a 30-day correlation with the 10-year yield of negative 0.94, according to ThinkOrSwim.
The utilities trade wasn't the only under-the-radar options trade that suggests the bond sell-off is slowing. Later in the day, in the bond pits at the Chicago Mercantile Exchange, someone placed a $4.4 million bond trade that short-term rates will reverse.
According to one floor trader who shared the trade off-the-record, someone bought 100,000 contracts of the March 96/96.12 call spread on SOFR futures, contracts that were trading around 95.51 at the time. It's a bet the overnight rate will slip back to yields not seen since June.
"Massive call buying today, big volume in here today ahead of jobs report tomorrow," the trader said. "The 10-year rate went over 5.3% and then came the rally."
What to Watch
AI outlook — possibilities, not facts
Jobs report release will influence rate direction
Likely · Within days
Open Questions
- How will the upcoming jobs report impact bond yields?
