The secret signs the bond sell-off might be ending
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.Β
It centered around a $1 million trade betting that the group stops going down or even rallies. As bonds have fallen β driving rates higher β 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.Β
Put volumes relative to calls peaked late last month at a ratio of 2.67, the highest since May, before falling last week as traders shift towards calls, Barchart data show. In Thursday's session, 74,000 calls were likely bought, compared to just 4,500 puts, according to SpotGamma.
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.Β
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."
