Option traders "buy the bottom" of the US Treasury market, betting on the yield peaking.

As the volatility in the US bond market intensifies, some options traders are starting to boldly "bottom fish." This type of operation carries extremely high risks, but if the market trend follows historical patterns, it could bring substantial returns. According to data from the Cboe Global Markets, demand for call options related to the iShares 20+ Year US Treasury Bond ETF (TLT.US) has surged in the past few weeks. Despite the continuous rise in long-term US Treasury bond yields, this phenomenon indicates that traders see potential rebound opportunities in the bond market sell-off. As of Monday, the 10-year US Treasury bond yield rose by 3 basis points to 4.801%, nearing its highest level since the end of 2023. The 30-year bond yield also rose on Monday to 4.988%, breaking 5% for the first time since the release of the non-farm payroll report last Friday. TLT's major holdings are concentrated in 30-year bonds issued in the past decade. Market expectations for a bond price rebound have also led to the so-called "skew" returning to normal levels, indicating that investor interest in call options is equal to that of put options. This phenomenon is very rare, as noted by Cboe Derivatives Market Intelligence Officer Mandy Xu, who pointed out that in the past few years, when the bond market quickly sold off, skew values would typically rise. According to Dow Jones market data, TLT option trading activity peaked on December 19, with over 1.5 million contracts traded that day, the day after the Federal Reserve hinted at a possible reduction in rate cuts in 2025. In addition, on the day after the US presidential election on November 6, demand for call options reached its peak, with over 850,000 contracts traded. The bond market has been in a historic bear market in recent years, with TLT recording annual declines for the fourth consecutive year. However, the rising yields have not deterred traders from seeking opportunities. In September and October 2023, TLT prices dropped by over 10%, but then rebounded by over 16% in November and December. Some traders expect this pattern to repeat and are betting that yields may approach short-term peaks. The leverage effect of option contracts also helps amplify potential returns. Gennadiy Goldberg, the head of US rate strategy at TD Securities, said, "Despite the long-term decline in TLT prices, its internal volatility is very high. The market rarely moves in a straight line." Since the Federal Reserve first cut rates in September 2024, a rare pattern has emerged in US Treasury yields: the increase in long-term rates is almost equal to the decrease in short-term rates. This phenomenon is attributed to a range of factors, including large amounts of new bonds issued in January, concerns about the sustainability of the US fiscal deficit, and expectations of economic growth potentially reigniting inflation. The rise in commodity prices has also pushed up yields. As long-term rates rise, the Fed's term premium valuation has reached its highest level in over a decade. This has intensified the sell-off in long-term bonds and is starting to put pressure on the stock market. The market is also filled with uncertainty about the potential impact of President-elect Donald Trump's policy agenda on the market. Tariff plans and large-scale deportation policies could boost inflation, further raising yields. Key economic data released this week, such as the Consumer Price Index (CPI) and retail sales, will be closely watched by the market. Goldberg expects that this data could have a significant impact on the bond market. Barclays' Global Macro Strategy team stated, "If there are no major data surprises this week, bond investors may gradually return to the market at higher yield levels."