The options market is sending a clear signal: some investors are making big bets on a sharp decline in long-term U.S. interest rates.
According to Dow Jones market data, there has been a notable surge in call option trading volumes on popular ETFs linked to long-term U.S. Treasuries and utility stocks, including the iShares 20+ Year Treasury Bond ETF (TLT) and the Utilities Select Sector SPDR ETF (XLU). This trend indicates that, against a backdrop of 10- and 30-year Treasury yields reaching multi-decade highs, some traders are positioning for a reversal in interest rates.


According to MarketWatch's report on October 7, Interactive Brokers Chief Strategist Steve Sosnick stated that the expansion in call option volume "usually implies a bullish view on the underlying asset," and the increased activity in TLT options "very directly" reflects traders' expectations for lower long-term interest rates. These two asset classes—long-term Treasuries and interest-rate-sensitive utility stocks—have both come under pressure amid the recent surge in yields. However, historically, whenever Treasury yields decline, these two sectors tend to be the first to benefit and rebound sharply.
Current U.S. Treasury yields have climbed to uncommon levels not seen in decades, exerting persistent downward pressure on long-term bond prices. According to FactSet data, the 10-year Treasury yield closed Wednesday at 5.276% and the 30-year at 5.660%, both close to their highest in decades, while the 2-year yield eased slightly to 4.762%.
The continued upward movement in yields has dealt a heavy blow to TLT. FactSet data shows that TLT has lost about 8.4% in total return so far this year, with its September monthly drop marking the worst since December 2024, and bringing its third-quarter cumulative loss to nearly 9%.
The utilities sector has long been seen as a classic example of a rate-sensitive asset. Sosnick pointed out that utility stocks have traditionally attracted investors due to their stable dividend payouts. However, when interest rates rise, the relative appeal of bonds increases, reducing the competitiveness of dividends and putting pressure on utility stocks as a result.
FactSet data shows that XLU is down about 10% over the past three months, with a total loss of 1.6% year-to-date.
However, Sosnick also noted that the rise of artificial intelligence is changing the traditional drivers for utilities. The massive electricity demand from data centers is deeply linking many utilities with AI infrastructure development, and "there is extreme optimism about the outlook for utilities, in large part due to the large-scale construction of AI infrastructure."
He specifically mentioned Constellation Energy—the company's stock surged this week after it signed a nuclear power supply agreement with Google’s parent company, Alphabet. As of last Tuesday, Constellation Energy held a 7.6% weight in XLU, making it the ETF's second-largest holding.
A call option gives investors the right, but not the obligation, to buy a security at a set price before a specified date. When call option volumes spike, it usually means market participants expect the underlying asset’s price to rise—for TLT, this means expectations for declining long-term rates and a rebound in bond prices.
Sosnick stated that the heightened activity in TLT calls is "very direct" in its meaning: "Bond bulls are entering the market." Historically, past pullbacks in Treasury yields have triggered sharp rebounds in long-term Treasuries, utilities, homebuilders, and small caps. This recurring pattern is likely the core logic behind current options market bets.
It is noteworthy that while rapid climbs in Treasury yields have often put pressure on equities, strong enthusiasm for technology stocks and the AI theme helped the S&P 500 and Nasdaq Composite both hit record closing highs on Tuesday, before retreating slightly on Wednesday.
The tension between interest rate trends and the AI narrative is currently one of the main axes of market competition.