A distinct trade is taking shape in the U.S. options market. Some investors are building positions for a sudden drop in long-term interest rates, using call options tied to long-dated Treasuries and utility-sector exchange-traded funds before any move materializes. After the sharp rise in Treasury yields since September, activity in those contracts has picked up, pointing to growing expectations that rates at the long end could reverse.
Call buying picks up in TLT and utilities ETFs
Dow Jones Market Data shows a notable increase in call option volume in the iShares 20+ Year Treasury Bond ETF (TLT) and the Utilities Select Sector SPDR ETF. TLT is directly tied to the price of long-dated U.S. government bonds, while the utilities fund tracks a sector that has traditionally been sensitive to interest rates. Both have been pressured by the climb in long-end Treasury yields.
Steve Sosnick, chief strategist at Interactive Brokers, said rising call volume usually signals that investors are taking a bullish view on the underlying asset. In TLT’s case, he said, the message is fairly direct: some traders are turning bullish on long-term bonds, which amounts to a bet that long-term rates will fall.
Long-dated Treasury yields remain near multi-decade highs
The increase in options activity comes after a substantial rise in U.S. long-term rates.
As of publication, the yield on the 10-year U.S. Treasury stood at 5.335%, while the 30-year yield reached 5.713%, both near the highest levels seen in decades. By comparison, the 2-year Treasury yield, which is more sensitive to monetary policy, was 4.814% on the day after also touching multi-year highs earlier.
Bond prices move inversely to yields. The continued rise in long-term yields has inflicted clear losses on investors holding long-duration Treasuries. FactSet data show that TLT posted its worst monthly total return since December 2024 in September, pushing its third-quarter decline to nearly 9%.
On Wednesday, TLT fell another 0.2%, extending its total return loss since the start of 2026 to about 8.4%. After a pronounced selloff in long-dated bond prices, the sudden rise in call option volume suggests that some investors are now betting the previous uptrend in yields may be close to turning.
The trade goes beyond a small move in short-term policy rates
Similar market action has appeared several times in recent years. When Treasury yields have fallen quickly from elevated levels, long-duration bonds have often rebounded first. Assets that are highly sensitive to financing costs and discount rates have also tended to rise, including utility stocks, homebuilders and small-cap shares.
That is why this options trade is not limited to a modest adjustment in short-term policy rates by the Federal Reserve. TLT mainly holds U.S. Treasuries with maturities longer than 20 years, so its performance is more directly tied to expectations for long-term rates. A bullish position in TLT is, in effect, a wager that long-end yields can fall meaningfully from current levels.
Utilities are drawing bullish bets too, but the signal is less pure
A similar pattern is showing up in utilities.
Utility companies have traditionally attracted investors with relatively stable cash flow and dividends, which makes them highly sensitive to changes in bond yields. When risk-free rates rise, bonds offer higher returns and the dividend appeal of utility stocks tends to weaken. When rates fall, that valuation pressure usually eases.
The Utilities Select Sector SPDR ETF slipped less than 0.1% on Wednesday and was little changed on the day, but it was down about 10% over the past three months and still lower by 1.6% for the year as of Wednesday. Against that backdrop, rising call option volume in the fund also suggests that some investors are positioning for a rebound.
Still, compared with TLT, the signal from utilities options is more complicated.
Sosnick said the artificial intelligence investment boom has altered the trading logic for some utility stocks. Data centers consume large amounts of electricity, and the rapid buildout of AI infrastructure by technology companies has gradually turned power generation and electricity suppliers into indirect beneficiaries of AI capital spending. As a result, bullish trades in utilities ETFs may reflect not only expectations for lower rates, but also bets on rising power demand tied to AI.
That factor has been especially visible recently. Constellation Energy shares jumped this week after the company reached a nuclear power supply agreement with Alphabet (GOOGL.O), Google’s parent company. As of Tuesday, Constellation Energy was also the second-largest holding in the Utilities Select Sector SPDR ETF, with a weight of 7.6%.
Sosnick said optimism in the options market toward utility stocks may partly stem from strong expectations for electricity demand created by the expansion of AI infrastructure.
Stocks and bonds are both watching for a turn in rates
Higher rates remain one of the biggest sources of pressure across U.S. financial markets. The rapid rise in long-term yields has hit bonds and other rate-sensitive assets such as utilities, and has at times weighed on equities as well.
On Wednesday, all three major U.S. stock indexes moved lower. The S&P 500 and the Nasdaq Composite both pulled back from record closing highs set in the previous session. Even so, technology shares and the AI investment boom have continued to support the main indexes, leaving the equity market not fully aligned with the traditional high-rate playbook.
That makes the latest shift in the options market more notable. The increase in TLT call buying offers a relatively clean trade on falling long-term rates, while bullish options activity in utilities combines two separate themes: rates and AI-driven electricity demand.
With the 10-year Treasury yield already above 5.3% and the 30-year yield above 5.7%, a group of options traders is positioning for a different market path. If long-term rates fall quickly from multi-decade highs, long-dated Treasuries and other rate-sensitive assets that have been under the most pressure in recent months could also become some of the strongest rebound trades.