Option traders bet on U.S. Treasury yields peaking, eyeing a TLT rebound.

As volatility in the U.S. bond market intensifies, some options traders are seizing the opportunity in this risk-laden environment to "buy the dip," betting that bond prices will rebound once yields peak. According to data from Cboe Global Markets, demand for call options related to the iShares 20+ Year Treasury Bond ETF (TLT.US) has surged recently, indicating that investors sense a potential opportunity amidst the current bond market sell-off.

U.S. Treasury Yields Near Historic Highs

As of Monday, the yield on 10-year U.S. Treasury notes rose by 3 basis points to 4.801%, nearing the historic high reached at the end of 2023. Meanwhile, the yield on 30-year Treasury bonds surpassed 5% for the first time since the non-farm payroll report last Friday, quoted at 4.988%. As a key target for investors betting on a rebound, TLT mainly holds 30-year Treasury bonds issued over the past decade.

Despite the continuous rise in long-term interest rates, the options market is showing unusual phenomena. Cboe data shows that the demand for TLT call options has surged, approaching a balance with put option interest, signaling investor optimism about a bond market rebound. Historical data indicates that such "skew" returning to smooth levels is extremely rare during major bond sell-offs.

Market Bets on Yield Peak

Recent trading activity in TLT also reflects a strong market sentiment. On December 19, TLT options trading volume reached a record high, with over 1.5 million contracts traded in a single day. Following the U.S. presidential election on November 6, the demand for call options also peaked, with daily trading volume exceeding 850,000 contracts.

Despite the bond market's bearish trend in recent years and TLT's consecutive yearly declines for four years, investors are still seeking rebound opportunities at high yield levels. Data shows that from September to October 2023, TLT prices fell by over 10%, followed by a rebound of more than 16% in November to December. Some traders believe this pattern might repeat, especially with current yields approaching short-term peaks.

TD Securities’ Head of U.S. Rates Strategy, Gennadiy Goldberg, stated: "While the long-term downward trend is evident, the volatility within TLT is significant, and markets usually don’t move in a straight line."

Fed Policy and Economic Data as Key

Since the first Federal Reserve rate cut in September 2024, U.S. Treasury yields have displayed a unique pattern: the rise in long-term rates has nearly matched the decline in short-term rates. This phenomenon is attributed to concerns about the U.S. fiscal deficit, a surge in new debt issuances, and renewed economic growth driving inflation expectations, among other factors. Additionally, rising commodity prices have contributed to the rise in yields.

Currently, the market is focusing on upcoming key economic data, including the Consumer Price Index (CPI) and retail sales reports. Analysts expect these data releases could have a significant impact on the bond market. Barclays’ Global Macro Strategy team believes that if there are no major surprises in this week's data, bond investors might gradually return to the market at higher yield levels.

Political Uncertainty Adds Market Volatility

The market also feels uneasy about the potential impact of newly-elected President Donald Trump's policy agenda. Tax reforms and potential large-scale policy changes might push inflation higher, further adding pressure on rising U.S. Treasury yields.

Facing the possibility of U.S. Treasury yields nearing their peak, some options traders are making bold bets, attempting to capture opportunities in the market's volatility. However, this strategy carries high risk, and future market movements will depend on upcoming economic data and the Federal Reserve's policy direction.

The market carries risks, and investment should be cautious. This article does not constitute personal investment advice and has not taken into account individual users' specific investment goals, financial situations, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their particular circumstances. Investing based on this is at one's own responsibility.

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