The options market is sending a clear signal: some investors are making large wagers that long-term U.S. interest rates are about to fall sharply.

According to Dow Jones Market Data, call option trading volume has surged recently in popular ETFs tied to long-dated U.S. Treasuries and utility stocks, including the iShares 20+ Year Treasury Bond ETF (TLT) and the State Street Utilities Select Sector SPDR ETF (XLU). This trend suggests that, with 10-year and 30-year Treasury yields at multi-decade highs, some traders have already begun positioning for a rate reversal.

According to a MarketWatch report on October 7, Steve Sosnick, chief strategist at Interactive Brokers, said the expansion in call option volume "typically signals a bullish view on the underlying asset," and that rising TLT options activity reflects "very directly" traders' expectations of declining long-term rates. Both types of assets鈥攍ong-dated Treasuries and rate-sensitive utility stocks鈥攈ave come under pressure during the recent yield surge, but historically, whenever Treasury yields retreat, they tend to be among the first to benefit and stage rapid rebounds.

Yields Stay Elevated, Long-Dated Treasury ETF Down Nearly 9% This Year

U.S. Treasury yields have climbed to levels rarely seen in decades, putting persistent pressure on long-dated bond prices. According to FactSet data, the 10-year Treasury yield closed at 5.276% on Wednesday and the 30-year at 5.660%, both near multi-decade highs; the 2-year yield edged lower to 4.762%.

The sustained rise in yields has dealt a heavy blow to TLT. FactSet data show TLT has lost about 8.4% in total return so far this year, with September marking its worst monthly performance since December 2024, widening its third-quarter cumulative loss to nearly 9%.

Utilities' Dual Logic: Rate Sensitivity Plus AI Power Demand

The utilities sector has long been viewed as a classic rate-sensitive asset. Sosnick noted that utility stocks have traditionally appealed to investors because of their steady dividend payouts, but when rates rise, bonds become relatively more attractive, dividends lose competitiveness, and utility stocks come under pressure.

FactSet data show XLU has fallen about 10% over the past three months and is down 1.6% in total return this year.

However, Sosnick also pointed out that the artificial intelligence wave is changing the traditional drivers of the utilities sector. Massive electricity demand from data centers has deeply tied many utility companies to AI infrastructure buildout. "People are extremely bullish on the utility outlook, partly because of the massive buildout of AI infrastructure," he said.

He specifically mentioned Constellation Energy, whose shares surged this week after signing a nuclear power supply agreement with Google parent Alphabet. As of last Tuesday, Constellation Energy accounted for 7.6% of XLU's weighting, making it the second-largest holding.

Options Signal: Traders Bet on a Rate Reversal

Call options give investors the right, but not the obligation, to buy a security at a set price before a specific date. When call option volume expands significantly, it usually means market participants expect the underlying asset's price to rise鈥攆or TLT, that means expectations of falling long-term rates and rising bond prices.

Sosnick said the implication of rising TLT call option activity is "very direct"鈥攖hat "bond bulls are stepping in." Over the past several years, periodic pullbacks in Treasury yields have repeatedly triggered rapid rebounds in long-dated Treasuries, utility stocks, homebuilders, and small-cap stocks, and this historical pattern may be the core logic behind current options traders' bets.

It is worth noting that although rapid rises in Treasury yields have repeatedly weighed on the stock market, strong enthusiasm for tech stocks and AI themes still pushed the S&P 500 and the Nasdaq Composite to record closing highs on Tuesday, before edging lower on Wednesday.

The tension between the path of interest rates and the AI narrative is becoming one of the most central battlegrounds in the current market.