A directional trade is building in the U.S. options market. Some investors are using call options on long-dated Treasury and utility-sector exchange-traded funds to position for a sudden drop in long-term interest rates. The activity has picked up after Treasury yields climbed sharply since September, pointing to a growing expectation that the rate trend could reverse.
Call activity rises in TLT and utilities ETF
Dow Jones Market Data shows that call option volume has increased notably in the iShares 20+ Year Treasury Bond ETF (TLT) and in State Street’s Utilities Select Sector SPDR Fund. The first tracks long-dated U.S. government bonds more directly, while the second represents a traditional rate-sensitive equity group. Both have been pressured by the rise in long-end Treasury yields.
Steve Sosnick, chief strategist at Interactive Brokers, said heavier call volume usually indicates that investors are taking a bullish view on the underlying asset. In TLT’s case, he said, the signal is fairly straightforward: some traders are turning positive on long bonds, which amounts to a bet that long-term rates will fall.
Long-term yields remain near multi-decade highs
The increase in options activity comes after a major move higher in U.S. long-term rates.
At publication time, the 10-year U.S. Treasury yield stood at 5.335% and the 30-year yield reached 5.713%, both near the highest levels seen in decades. The policy-sensitive 2-year Treasury yield was 4.814% on the day after also reaching multi-year highs earlier.
Bond prices move inversely to yields. The continued rise in long-term yields has inflicted meaningful losses on investors in long-duration Treasuries. FactSet data showed that TLT posted its worst monthly total return since December 2024 in September, bringing its third-quarter decline to nearly 9%.
On Wednesday, TLT slipped another 0.2%, extending its total-return loss since the start of 2026 to about 8.4%. After a clear decline in long-bond prices, the sudden increase in call-option trading suggests that some investors are beginning to bet that the previous uptrend in yields may reverse.
This is a bet on a bigger move
Similar market episodes have appeared several times in the U.S. over the past few years. When Treasury yields retreat quickly from elevated levels, long-dated bonds tend to rebound first. Assets that are highly sensitive to financing costs and discount rates often follow, including utility shares, homebuilders and small-cap stocks.
That is why this options trade does not appear limited to a minor adjustment in the Federal Reserve’s short-term policy rate. TLT mainly holds U.S. Treasuries with maturities longer than 20 years, so its performance is tied more directly to expectations around long-term rates. A bullish TLT trade is, in practice, a bet that long-end yields can fall sharply from current levels.
Utilities are drawing bullish wagers too
A similar setup has emerged in the utilities sector.
Utilities have traditionally attracted investors with relatively steady cash flow and dividends, making them highly sensitive to changes in bond yields. When the risk-free rate rises, bonds offer higher returns and the dividend appeal of utility stocks weakens. When rates move lower, that valuation pressure usually eases.
The Utilities Select Sector SPDR Fund was down by less than 0.1% on Wednesday, essentially flat on the day, but it has fallen about 10% over the past three months and remained down 1.6% for the year through Wednesday. Against that backdrop, rising call-option volume points to a growing group of investors betting on a rebound in the sector.
Still, the utility options signal is more complicated than the one in TLT.
Sosnick said the AI investment boom has changed part of the old trading logic for utility stocks. Data centers consume large amounts of electricity, and the rapid expansion of AI infrastructure by technology companies has made power generation and electricity suppliers indirect beneficiaries of AI capital spending. As a result, bullish trades in utility 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 surged this week after the company reached a nuclear power supply agreement with Alphabet, Google’s parent company (GOOGL.O). As of Tuesday this week, Constellation Energy was also the second-largest holding in the State Street utilities ETF, with a weight of 7.6%.
Sosnick said some of the optimism visible in the options market for utility stocks may come from strong expectations for electricity demand created by AI infrastructure expansion.
Stocks and bonds are watching for a turn in rates
Higher interest rates remain one of the biggest sources of pressure across U.S. financial markets. The rapid climb in long-term yields has hit bonds and other rate-sensitive assets such as utility stocks, and it has at times also weighed on equities.
On Wednesday, all three major U.S. stock indexes moved lower. The S&P 500 and the Nasdaq Composite both pulled back after closing at record highs in the previous session. Even so, technology shares and the AI investment wave are still supporting the major indexes, meaning the equity market is not moving entirely in line with the traditional high-rate playbook.
That makes the shift in options activity stand out more clearly. Rising call volume in TLT offers a relatively pure trade on falling long-term rates, while bullish positioning in utility ETFs carries two overlapping themes: interest-rate relief and AI-driven power 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 retreat 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.